Sri Lanka is moving in the right direction to face the risks associated with global economic shifts, while much more remains to be done, Standard Chartered Bank Mumbai, Head of South Asia, Economics Research, Anubhuti Sahay said.
Addressing the Sri Lanka Economic Summit yesterday in Colombo, Sahay noted that Sri Lanka’s economy would be vulnerable to three major global economic shifts; slow down of the pace of easing by major Central Banks including Federal Reserve and ECB, escalating protectionism and slower productivity growth.
She pointed out that the five top Central Banks have injected US$ 2 trillion dollars on an annual basis to maintain market and growth, following the financial crisis where emerging markets benefited from these ample liquidity.
However, she noted that these liquidly injection would drop to zero in 2019 and said the ECB and the Federal Reserve have taken measures to normalise it.
“Following the financial crisis, CB pursued ultra lose monetary policies, but they are trying to normalise it by raising rates and by reducing liquidity in the global market on the whole. Fed have hiked rates by 150 basis points since 2016, and their rates are very close to zero.
“Given the strong growth in the US though it comes back offer a sugar rush of fiscal stimulus, we think they are on track to go and raise rates by four more times from here till mid of 2019, not only they starting to raise rates, they actually started taking liquidity from the global markets.
“ECB is not hiking rates. We think they are still far away from hiking rates, maybe it’s more of a story for second half of 2019 than 2018 itself, but they are on a well telegraphed path to bring an end to their liquidity injection plan by end of 2018”.
Sahay stressed that the shift is massive and it’s inevitable that it will have an impact on interest rates across the world including in Sri Lanka.
“It will have massive impact on FX, and currencies are likely to stay under pressure and it will increase financial volatility, and higher oil prices are not helping much.
What further complicates is the second big shift which is to do with rising protectionism,” she noted.
Referring to a recent study done by the Standard Charted, she revealed that if the US bans all Chinese imports to US in an extreme case, the US is likely to lose 1 percent of GDP while China is likely to lose over 3 percent.
She insisted that the impact would be massive, given the size of the economies of the two countries.
She emphasised that the economies which are running on twin deficits (current account and fiscal deficits) would get hurt the most to these shifts including Sri Lanka.
The financial markets are expected to get affected the most in short term than the real economy.
“A bigger round of risk is primarily going to come through financial markets through the loss of confidence, and that will put further pressure on currencies and it will create a lot more problems for policymakers in the rest of the world,” she said.
Sahay also revealed that during 2008-2017, Sri Lanka had lost the maximum number of ranks in the global competiveness index among its Asian peers due to slower pace of reforms.
However, she said that Sri Lanka is on the right path as the country has already begun implementing corrective measures under the IMF.
“The government has already moved to narrower the fiscal deficit by enhancing revenues and not by cutting expenditure which is not worthy,” she added.
However, she stressed that a lot more remains to be done to face the risks associated with these shifts.
She recommended Sri Lanka to pursue economic diversification while leveraging on its strength such an educated healthy face and to improve the investment climate to face these challenges.
“Reforms have never been implemented during good times. They are always implemented during the most difficult times,” she said.