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Navigating Through Global Uncertainty - How Countries Can Build Resilience

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Sri Lanka Economic Summit 2018

Commencing this week, Economy.lk will put forward a series of articles on the key insights from the recently concluded Sri Lanka Economic Summit 2018 on the theme ‘On the fast track to a turnaround’. 

Sri Lanka has to navigate many global and regional risks, both in the form of political and economic risks. Strategically executed trade reforms, a clear communication strategy, while engaging with the private sector will be vital for overcoming external risks. These were some of the themes discussed at this year’s summit where 56% of the audience felt that external factors will have a bigger say in the turnaround than domestic factors.

1. The tap on easy money is slowly being closed, and emerging markets are to bear the brunt of it

Following the global financial crisis in 2007/08, the five top Central Banks have injected US $ 2Tn to the market on an annual basis, and emerging markets have benefited from this ample liquidity. These liquidity injections are anticipated to drop to zero in 2019, with the European Central Bank (ECB) and the Federal Reserve taking measures to normalize it. This is likely to have a massive impact on foreign exchange across the board, and currencies are likely to stay under pressure. The fallout from this normalization has already been witnessed in 2018 with significant currency adjustments in emerging markets. 

2. Intensifying trade wars and rising protectionism is adversely affecting global financial markets – countries with twin deficits in hot water

According to a recent study by Standard Chartered Bank, if the US bans all Chinese imports to the US - in an extreme case - the US is likely to lose 1% of GDP while China is likely to lose over 3% of GDP. As a result of this, financial markets are most likely to get affected in the short term than the real economy, with massive risks coming through the loss of confidence, and putting further pressure on currencies. Given the reliance on international capital markets, economies such as Sri Lanka running on twin deficits are likely to be most vulnerable to these financial market shifts.  

Managing external vulnerabilities by maintaining an adequate reserve cover, continuing on the path of fiscal consolidation along with policy consistency and persistency of reforms to strengthen investors’ confidence, will provide resilience against the impact of such global and regional risks.

 

“Asia is at risk of growing old, faster than it is getting rich” - Dr. Eteri, Resident Representative in Colombo, IMF 

 

3. The challenges of slower productivity onset by an increasingly aging population – Sri Lanka is not alone!

Asia remains the highest contributor to global growth, however is at the risk of growing old faster than it is of getting richer, a similar concern that Sri Lanka faces. Productivity therefore is slowing, inequality increasing, and trade wars threaten economic gains from past decades.

 

4. Improving trade integration with South Asia, and formulating an aggressive trade policy will give Sri Lanka a much needed competitive edge

Asia has become highly integrated in global trade in the past two decades and any escalations of trade tensions threatens trade linkages and supply chains. Sri Lanka needs to begin creating and improving much needed trade links, especially with the East while integrating with South Asia. Sri Lanka has gained significant benefits from original Indo-Sri Lanka Free Trade Agreement (ISLFTA), and should formulate an aggressive trade policy to boost export, trade, and employment.

In addition to the above risks, Sri Lanka also has to overcome the challenges of unpredictable weather patterns and escalating fuel prices, further impacting the country’s ability to remain competitive in an increasingly challenging global environment.

 

Results from Audience Poll Question: Will external factors (global market pressures) have a bigger say in the turnaround than domestic factors?

 

 

 

The Ceylon Chamber of Commerce

Economic Intelligence Unit

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