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ECONOMIC CRISIS AND ITS IMPACT ON ECONOMIC DEVELOPMENT (SPECIAL REFERENCE TO SRI LANKA)

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Aim : The aim of the study is to find out the reason of economic crisis in Sri Lanka and the recovery methods for reducing the impact of economic crisis on Sri Lanka’s developments. Methodology: Since it is a qualitative research, data were collected from articles, books and online resources. Result: There is no universal recipe for all types of crisis, not only for Sri Lanka, But also all countries in case of a specific crisis. The best strategy to cope with such events is to use the optimal undesirable effects on the combination of policy ingredients that will minimize the economy .Sri Lanka must be concentrated and responded on Prevent increasing and possibly unsustainable deficits; Contrary to the policy in developed economies affected by the crisis, interest rates should be slightly increased in order to maintain inflation at low levels; Precautionary investment policy, especially with respect to large (and somehow risky) projects in manufacturing, when such projects are financed by the state budget; Better and careful monitoring over the internal financial system, even if the system seems healthy and not affected by contagion. Prevention, rather than curing, is the right policy in these times. Among the experts in the field, there is a clear consensus that in case of such a financial crisis, with possible implications on real economy, the first thing to be done by decision makers is to avoid populist policies. Conclusion: The economic crisis severely affects on Unemployment, Inflation, Ecconomic growth, Export and Import .but, Sri Lanka tries to prevent from such hazards. Therefore what is desirable is to formulate a new/alternate economic model (based on socially- oriented market economy) where the benefits of economic development are not concentrated in a few but shared by all. Coming back to the Russian summit, BRIC refers to four fast-growing developing economies, namely Brazil, Russia, India and China. Now that Sri Lanka has been granted delegate status at the Shanghai Cooperation Organization, we would be eligible to get enrolled into “BRIC block” if Sri Lanka could truly demonstrate its capabilities as an emerging economy by working out and adopting this new economic model which is in line with “Mahinda Chintana” policies.
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Review Paper: Shibly, 2013: Pp.101-106
ECONOMIC CRISIS AND ITS IMPACT ON ECONOMIC DEVELOPMENT (SPECIAL REFERENCE TO SRI
LANKA)
Shibly, FHA
Department of Arabic Language, South Eastern University of Sri Lanka
Corresponding author: shiblymis@gmail.com
ABSTRACT
Aim: The aim of the study is to find out the reason of economic crisis in Sri Lanka and the recovery methods
for reducing the impact of economic crisis on Sri Lanka’s developments. Methodology: Since it is a
qualitative research, data were collected from articles, books and online resources. Result: There is no
universal recipe for all types of crisis, not only for Sri Lanka, But also all countries in case of a specific crisis.
The best strategy to cope with such events is to use the optimal undesirable effects on the combination of
policy ingredients that will minimize the economy .Sri Lanka must be concentrated and responded on
Prevent increasing and possibly unsustainable deficits; Contrary to the policy in developed economies
affected by the crisis, interest rates should be slightly increased in order to maintain inflation at low levels;
Precautionary investment policy, especially with respect to large (and somehow risky) projects in
manufacturing, when such projects are financed by the state budget; Better and careful monitoring over the
internal financial system, even if the system seems healthy and not affected by contagion. Prevention, rather
than curing, is the right policy in these times. Among the experts in the field, there is a clear consensus that in
case of such a financial crisis, with possible implications on real economy, the first thing to be done by
decision makers is to avoid populist policies. Conclusion: The economic crisis severely affects on
Unemployment, Inflation, Ecconomic growth, Export and Import .but, Sri Lanka tries to prevent from such
hazards. Therefore what is desirable is to formulate a new/alternate economic model (based on socially-
oriented market economy) where the benefits of economic development are not concentrated in a few but
shared by all. Coming back to the Russian summit, BRIC refers to four fast-growing developing economies,
namely Brazil, Russia, India and China. Now that Sri Lanka has been granted delegate status at the Shanghai
Cooperation Organization, we would be eligible to get enrolled into “BRIC block” if Sri Lanka could truly
demonstrate its capabilities as an emerging economy by working out and adopting this new economic model
which is in line with “Mahinda Chintana” policies.
INTRODUCTION:
The term economic crisis is applied broadly to a
variety of situations in which some financial
institutions or assets suddenly lose a large part of
their value. In the 19th and early 20th centuries,
many financial crises were associated with banking
panics, and many recessions coincided with these
panics. Other situations that are often called
financial crises include stock market crashes and
the bursting of other financial bubbles, currency
crises, and sovereign defaults. Many economists
have offered theories about how financial crises
develop and how they could be prevented. There is
little consensus, however, and financial crises are
still a regular occurrence around the world.
Economic Crisis Overview: The global financial
crisis, brewing for a while, really started to show its
effects in the middle of 2007 and into 2008. Around
the world stock markets have fallen, large financial
institutions have collapsed or been bought out, and
governments in even the wealthiest nations have
had to come up with rescue packages to bail out
their financial systems. On the one hand many
people are concerned that those responsible for the
financial problems are the ones being bailed out,
while on the other hand, a global financial
meltdown will affect the livelihoods of almost
everyone in an increasingly inter-connected world.
The problem could have been avoided, if ideologues
supporting the current economics models weren’t
so vocal, influential and inconsiderate of others’
viewpoints and concerns. The term economic crisis
is applied broadly to a variety of situations in which
some financial institutions or assets suddenly lose a
large part of their value. In the 19th and early 20th
centuries, many financial crises were associated
with banking panics, and many recessions
coincided with these panics. Other situations that
are often called financial crises include stock
market crashes and the bursting of other financial
bubbles, currency crises, and sovereign defaults.
Many economists have offered theories about how
financial crises develop and how they could be
prevented. There is little consensus, however, and
financial crises are still a regular occurrence around
the world (John, 1997).
Economic Crisis in Sri Lanka: In the initial decade
of the 21st century, the world has come to grip with
the frightening scene of an economic crisis which -
according to some - has no known precedent in
history. The collapse of the banking system on
which the countries depend for their economic
activity has resulted in a multiplicity of problems,
such as causing joblessness, bringing development
to a standstill, shutting down of industrial and
business organisations, and lowering the living
standards of populations and the downward spiral
of global trade. The first sign of the global economic
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crisis became visible in the U.S. housing market
sector in 2008. Since then it has been spreading to
almost every country in the world developed as
well as developing. At first, we were hopeful that
we would not be affected by the ill-effects of the
depression, but now there are signs indicating that
we too would be caught up in the vortex. Ours is an
export-import oriented economy. We export tea,
rubber, coconut, spices, ready-made garments and
jewellery etc. to earn the necessary foreign
exchange to pay for the country’s import needs. The
countries which buy these things from us have been
badly affected and demand for them is ever on the
decrease. There are warnings that the plantation
sector has begun to feel the clutches of the crisis.
Several local industries have already laid off their
work staff as a result of having no demand for their
produce in the international market. The nationals
who have migrated for employment abroad is
another principal sector sending valuable foreign
currency to their motherland, which is much
needed for her economic development activity.
They too have faced the threat of losing their
employment in view of the looming economic crisis
in the respective countries where they work. As a
result of this situation, Sri Lanka’s economy too has
become exposed to the worsening global disaster.
Set against this background where we are subject to
the evil consequences of the global economic crisis,
we have to evolve our own strategies to tide over
this period of stress. There are numerous examples
in history that demonstrate that, if you have the
necessary confidence and courage, it is possible to
overcome any obstruction. If Japan and Germany,
which were reduced to debris by the Second World
War, could rise, in a short time, as giant economic
powers, we can reduce the impact of the crisis
provided the government adopts proper fiscal
measures and the nation is geared with
determination to overcome the hurdle. Similarly,
business establishments in the private sector
should not decide at once to wind up just because
the demand for their products, in the international
market, has decreased. In the unfolding scenario it
is inevitable there is the need to reduce staff. Yet
they should not think of a complete shutdown.
Instead, ways and means should be found to reduce
overhead charges and day to day running expenses
by evolving other strategies so that when
conditions are improved they will be able to restart
their enterprises. Alternatively they should change
over to produce goods marketable locally (Annual
Report, 2008).
In this connection, it has to be pointed out that the
potential of the internet is of immense help to shore
up the wobbling ventures. The modern trend is that
most of the work done in offices is outsourced.
There are several advantages in this method of
getting work done. There is no necessity to
maintain big offices and spend money on
infrastructure. Work could be got done several
times cheaper engaging those who work from
home. Strikes do not disrupt the continuous flow of
work and the management is not called upon to pay
EPF, ETF and other fringe benefits in case of
outsourcing. In this setup, offices are required to
maintain only a minimum skeleton staff. Why don’t
our local entrepreneurs think about this positively
in order to tide over the stress instead of shutting
down their ventures for good?. Time has come for
us to think of our priorities. What is our first
priority? It is to live as a nation. Then, it is
inevitable to draw a dividing line between what is
essential and inessential. Saving every cent of
foreign exchange is a must in this critical period to
harness it for imports essential for national
survival. Take a look around you, and you will see
what and what inessential items of goods have
flooded the market. For example, even small boys
and girls attending school are armed with mobile
phones. Are these things essential for their
education? Open market policy needs
reconsideration at this juncture if we are to save
foreign exchange to survive this calamity. Example
should flow from our leadership who, it is a pity,
only preaches but rarely practises what they want
other people to do. First, they should tighten their
belts and then ask the common man and woman to
follow suit. If they abandon their joy rides abroad
what a colossal amount of foreign exchange the
country can save at this time of scarcity! This crisis
has driven us to make a timely evaluation between
nationalism versus internationalism. Some people
exhort that there is no place for nationalism in
these days when the world has shrunk to a global
village due to the fast developing information
technology. There is no intention to challenge this
assertion. What is meant here is that we should not
allow internationalism to subjugate our national
identity and make us unnecessarily dependent on
the international community. In other words it
means that we should endeavour to be self-
sufficient wherever we can. If we act in this manner,
the nation can tide over this calamity, and the
whole country will be with the government if it is
convinced that the motives of the leadership are
directed towards the general well-being of the
masses. In the below example (Figure 1), you can
see the effect of the economic crisis in South Asia.
Especially Srilanka lost their GDP by10.2% which is
higher than India (www.imexport.gov.lk).
Fig: 1. Source:- Central Bank of Sri lanka
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Root Causes for Economic Crisis: Certain
pessimistic opinions consider that the current
financial crisis may well be the biggest since the
1930s one, which ended up with the virtual collapse
of market activity for several years, a very sharp fall
in output and huge increase in unemployment,
which required a decade for the economies around
the world to recover. However, the current crisis is
different from past similar events because the
inter‐linkages among financial institutions are
much stronger now. It started as a (relatively
isolated) crisis in low‐quality mortgage loans in US,
but it then spiraled out of control because the
institutions that were making those mortgage loans
were dependent on other institutions for the money
they were using to lend. And those institutions
were depending on other institutions. So very
quickly, this spiraled into a crisis affecting financial
institutions everywhere, triggered by the fact that
the global financial system was already
contaminated by increasing risk‐taking in search of
higher yield, and the use of sophisticated
mechanisms such as asset‐backed securities and
structured credit products; neither the markets, nor
the regulators were fully aware of the potential
danger of these practices for the financial stability
of the system. Initially, the phenomenon was not
considered very seriously by decisional factors, but
the fact that economic and financial globalization
has been faster in the last decade that the speed of
policy and regulatory adjustment led quickly to
banking crisis affecting most of developed
countries. In fact, the crisis got a world dimension
because a regulatory framework for financial
institutions exists only at national level. Or, in our
days these institutions operate at global level, but
no international regulatory framework exists; to a
large extent, the spread over of the crisis at
international level is not the result of a bad
regulatory framework, but the consequence of the
fact that a global framework does not exist at all.
This deficiency may lead to a systemic crisis, which
will force the decisional factors to react accordingly
and design international regulations, while
reshaping the national ones (Ajith Nivard, 2008).
Causes and Consequences of Financial Crises:
Strategic complementarities in financial markets. It
is often observed that successful investment
requires each investor in a financial market to
guess what other investors will do. It has been
argued that if people or firms have a sufficiently
strong incentive to do the same thing they expect
others to do, then self-fulfilling prophecies may
occur. For example, if investors expect the value of
the yen to rise, this may cause its value to rise; if
depositors expect a bank to fail this may cause it to
fail. Therefore, financial crises are sometimes
viewed as a vicious circle in which investors shun
some institution or asset because they expect
others to do so.
Leverage: Leverage, which means borrowing to
finance investments, is frequently cited as a
contributor to financial crises. When a financial
institution (or an individual) only invests its own
money, it can, in the very worst case, lose its own
money. But when it borrows in order to invest
more, it can potentially earn more from its
investment, but it can also lose more than all it has.
Therefore leverage magnifies the potential returns
from investment, but also creates a risk of
bankruptcy. Since bankruptcy means that a firm
fails to honor all its promised payments to other
firms, it may spread financial troubles from one
firm to another
Asset-liability mismatch: In an international
context, many emerging market governments are
unable to sell bonds denominated in their own
currencies, and therefore sell bonds denominated
in US dollars instead. This generates a mismatch
between the currency denomination of their
liabilities (their bonds) and their assets (their local
tax revenues), so that they run a risk of sovereign
default due to fluctuations in exchange rate.
Uncertainty and herd behavior: Unfamiliarity with
recent technical and financial innovations may help
explain how investors sometimes grossly
overestimate asset values. Also, if the first investors
in a new class of assets (for example, stock in "dot
com" companies) profit from rising asset values as
other investors learn about the innovation (in our
example, as others learn about the potential of the
Internet), then still more others may follow their
example, driving the price even higher as they rush
to buy in hopes of similar profits. If such "herd
behavior" causes prices to spiral up far above the
true value of the assets, a crash may become
inevitable. If for any reason the price briefly falls, so
that investors realize that further gains are not
assured, then the spiral may go into reverse, with
price decreases causing a rush of sales, reinforcing
the decrease in prices.
Impact on Macro Economic Variable in Sri Lanka:
Economic crisis has done so many damages into the
variables of economics in several ways. According
to the Sri Lanka’s situation, I can explain this
concept by using plenty of statistics and papers.
particularly, this crisis attacked variables mainly,
Unemployment, Inflation, Ecconomic growth,
Export, Import and I am explaining these variables
below.
Unemployment: The state of being unemployed or
not having a job; "unemployment is a serious social
evil"; "the rate of unemployment is an indicator of
the e health of an economy. In Srilanka’s situation,
we can see the below chart to understand the
unemployment up and down clearly. Following
graph shows the unemployment rate for Sri Lanka
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for the last 6 years with an estimation value for
year 2008. Actual figures for 2008 are yet to be
published. With the current economic crisis, what
would be the rate for 2009? Prediction is, it will for
sure go above 7.2% which is the current rate for US.
Fig: 2. Sources: - www.infosl.com
In the above example, There are some declining
trend is available in the unemployment rate by
comparing 2007 and 2008 indicators. So, I can
write that there are very few changes happened due
to the economic crisis. I found some reasons to this
unchanged situation. Such as, Outsourcing., Small
Medium Businesses, Self employments, Migrations
and Emerging industries.
Inflation in 2008 during the economic crisis’s
initial period: Sri Lanka's central bank has warned
that inflation may remain high around 16 to 20
percent in the first half of 2008 and blamed "low
supply" of domestic foods for the sudden price
jump of 3.0 percent in January. Eighty percent of the
price increases was due to food, the monetary
authority said, while an increase fuel and cooking
gas brought in 16 percent, pushing inflation
measured by the new Colombo Consumer Price
Index to 20.8 percent from 18.8 percent in
December. "The pass through of international price
increases, though it leads to a one time increase in
prices, will have a favorable impact on containing
future inflation by eliminating the need for
subsidizing same, through expansionary
borrowings of the government," the Central Bank
said. This one time increase will be gradually
dissipated over the next few months. Hence, until it
is fully dissipated, inflation is likely to remain
around 16 to 20 per cent during the first half of
2008." The central bank also claimed that the
upward trend in prices in 2007 was largely due to
the removal of a fuel subsidy and increases in prices
of imported food products.
Fig: 3. Sources: - CBSL
Colombo Consumers' Price Index (CCPI)
Consumers' Price Index (CPI)
Sri Lanka inflation rate lowest ever in June 2009:
June 30, Colombo: Sri Lanka Central Bank today
said the country's annual inflation grew only 0.9
percent in June falling from a year-on-year rate of
3.3 percent for the month of May. The decline is
continuing for the twelve months from a high of
28.2 recorded in June 2008.
Sri Lanka's Annual Average inflation dropped to the
lowest level since April 2007, 12.5% in June from a
14.7% in May while the Colombo Consumers' Price
Index (CCPI) increased slightly to 207.8 from 205.1
in May 2009. The Central Bank attributed the
decline to the tight monetary policies of the Bank
that targets the reserve money to keep the inflation
checked.
Sri Lanka Economic Growth: Sri Lanka's economic
growth is forecast to slow sharply to 2.5 percent
this year, from six percent last year and then
recover to five percent in 2010, the central bank
said. The Sri Lankan economy is projected to grow
at a lower rate in 2009 and then recover its growth
momentum in 2010 with expected recovery in the
global economy," the bank said in its annual report
for 2008. Central Bank governor Nivard Cabraal
said new conditions such as the liberation of the
north from Tamil Tiger separatist rebels will
provide tremendous opportunities for the country.
"The end of the war will be looked at positively by
foreign investors," he told a news conference where
he presented the annual report. "We are at a cross
roads, notwithstanding global developments."
Government forces have cornered the rebels on a
small strip of coast in the north-east and say they
are about to crush the guerrillas. Cabraal said
economic growth may be between 4.5 to 5.0
percent in 2009 if conditions are favourable. "On a
more pessimistic assessment it can be between 2.5
to 3.5 percent," he said. "But new conditions of
liberating the entire country from terrorists will
have an impetus on growth." The bank's annual
report said the economy has been growing over six
percent continuously for four consecutive years
since 2005. This strengthened the prospects of the
economy achieving the medium-term growth
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targets of eight per cent enunciated in the
government's medium-term macroeconomic policy
framework, the bank said. Growth is likely to
slowdown in 2009 primarily due to the impact of
the global financial crisis and subsequent global
recession on Sri Lanka, the bank said. The overall
budget deficit for 2009 is projected at seven
percent, down from a provisional 7.7 percent in
2008. The central bank said, inflation, which
decelerated to a single digit in February 2009, is
projected to remain at a single digit level
throughout 2009 and stabilise at a low level in the
medium-term. "The high inflation experienced over
a long period of time remains one of the
weaknesses in the Sri Lankan economy," the report
said. This has been fuelled largely by the excessive
monetary expansion arising from the increased
financing of widening fiscal deficits with bank
resources." In order to contain the inflation and
inflation expectations, the Central Bank adopted a
quantity based stringent monetary policy strategy
in 2007 and 2008 that has yielded desired results
supported by declining international commodity
prices, it said. With the expected global recovery,
the international commodity prices might also
revert to pre-crisis levels, the bank warned.
Export: Sri Lanka's exports, particularly to the
United States, have been suffering even before the
global meltdown due to excessive money printing
since 2004 that drove the country's inflation to
much higher levels than the rest of the world.
Annual inflation above 20 percent in recent years
had made the rupee progressively 'overvalued', but
foreign borrowings and seesawing monetary policy
has strengthened the currency. By November 2008,
the Sri Lanka rupee was 28 percent overvalued on a
real effective exchange rate index calculated by the
country's central bank. The export incentives are a
part of what the government calls a 'stimulus
package' to make up for an overvalued currency,
amidst calls from exporters to depreciate the
currency. In 2008, Sri Lanka's industrial exports
grew by only 3.2 percent with apparel, the island's
main industrial export, growing 3.9 percent.
International trade minister G L Pieris say a 3.0
percent incentive will be given if 90 percent
revenues can be shown. Once a payment is
approved, an exporter can also use the certificate to
set of tax payments to the Treasury. But emerging
trends seems to indicate that even a 90 percent
target may be tough. Already in December 2008,
revenues from apparel had fallen 6.3 percent while
industrial exports as a whole plunged 18.4 percent.
Import: Sri Lanka will have to further relax import
tariffs on goods like cement from April this year
under its trade deal with India, with customs
revenues taking a hit. Sri Lanka's bilateral trade
agreements with both India and Pakistan allow for
a phasing out of tariffs over a eight year period, for
goods that are not on a sensitive list. Under the
Indo-Lanka Free Trade Agreement, tariffs are to
come down to not less than 70 percent of the
general customs duty rate this year. That means, for
imports of finished goods from India, tariffs will
drop from 28 percent to 8.40 percent and from 2.5
percent to 0.75 percent for industrial raw materials
and machinery. The rates will have to be made
effective from April this year, though no dates of
implementation have been announced yet, C W
Jayatilake, Director General of Sri Lanka Customs,
said on Thursday. "Barriers are going to be
diminished as far as our taxes are concerned." The
tariff phase on Indian imports covers over 2000
products. Tariffs under the Sri Lanka-Pakistan FTA
will also have to be relaxed by 30 percent of
customs duty rates from July this year. About 17
percent of Sri Lanka's total imports are from India
to the tune of US$ 1.4 billion.India is also Sri Lanka's
third largest export market, buying up US$ 560
million in goods last year. The trade agreements
will whack revenues from customs duties, with
Jayatilake expecting a three to four percent drop on
the Rs42 billion in duty collections last year. "This is
going to diminish taxes in areas where so much is
being collected at the moment. Tariffs will be
phased out on some of our highest revenue
collecting items like cement." Commonly traded
items from India includes petroleum products,
motor cycles, motor vehicles, cement, paper
products, lentils, onions, man-made fibres among
others. Top items that Sri Lanka exports to India
include copper and copper products, vegetable oil,
spices like pepper, tea, rubber products, machinery
parts, tiles, apparel and clothing.
How does Sri Lanka responded these issues?:
There is no universal recipe for all types of crisis,
not only for Sri Lanka, But also all countries in case
of a specific crisis. The best strategy to cope with
such events is to use the optimal undesirable effects
on the combination of policy ingredients that will
minimize the economy.Sri Lanka must be
concentrated and responded on: i) Prevent
increasing and possibly unsustainable deficits; ii)
Contrary to the policy in developed economies
affected bythe crisis, interest rates should be
slightly increased in order to maintain inflation at
low levels; iii) Precautionary investment policy,
especially with respect to large (and somehow
risky) projects in manufacturing, when such
projects are financed by the state budget; iv) Better
and careful monitoring over the internal financial
system, even if the system seems healthy and not
affected by contagion. Prevention, rather than
curing, is the right policy in these times. Among the
experts in the field, there is a clear consensus that
in case of such a financial crisis, with possible
implications on real economy, the first thing to be
done by decision makers is to avoid populist
policies. It is recommended that, depending on the
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avity of the crisis and its implications furor the, the
actions should be taken at three different levels: 1.
Policy measures for the financial sector:
vulnerability indicators, proposed by IMF, will
provide an overall picture of country’s financial and
banking sector. The use of inerrability indicators is
recommended even if he rest of the would the
sector is not very well developed or is relatively
isolated from trld financial system. 2. Actions under
the authority of the Central Bank for managing the
exchange rate and the inflation. Since the most
likely influence on the economy will come through
the deterioration of the terms of trade and decline
in exports, the exchange rate stability is crucial for
coping with this situation. Controlling inflation may
also help in limiting the economic fallout,
particularly in case of credit problems. 3.
Vulnerability indicators are proposed by IMF to
monitor the government, financial, and household
and corporate sectors. When economies are under
stress, problems arising in one sector often spread
to other sectors. Concerns about the fiscal deficit,
for example, may lead to a run on the exchange rate,
or undermine confidence in banks lding
government debt, thereby triggering banking crisis.
CONCLUSION
The conclusion here is that the free market
economic policies if not managed properly, are
undesirable in terms of achieving true economic
development and improve the quality of life of the
people. It is interesting to note that United Nations,
Food & Agricultural Organization (FAO) has last
week reported that agricultural sector is more
resilient to global financial crisis than any other
sector of the economy. Our farmers have been
working on this premise anyway. As I stated the
carbon dioxide emissions per capita in metric tons,
based on 2004 figures : Sri Lanka- 0.6(Low); India-
1.2; Brazil- 1.8; China-3.9; we are even better than
“BRIC” countries and US figure was as high as 20.6
per capita in metric tons (World Development
Report 2009). Therefore what is desirable is to
formulate a new/alternate economic model (based
on socially- oriented market economy) where the
benefits of economic development are not
concentrated in a few but shared by all. Coming
back to the Russian summit, BRIC refers to four
fast-growing developing economies, namely Brazil,
Russia, India and China. Now that Sri Lanka has
been granted delegate status at the Shanghai
Cooperation Organization, we would be eligible to
get enrolled into “BRIC block” if Sri Lanka could
truly demonstrate its capabilities as an emerging
economy by working out and adopting this new
economic model which is in line with “Mahinda
Chintana” policies.
I sketched out a solution to our financial crisis, in
three parts. (1) Stabilize the financial system –
Being attempted, probably now it’s too late. (2a)
Stabilize the economy with monetary stimulus–
Rates are coming down and money printed,
but probably with relatively little effect. (2b
Stabilize the economy with fiscal stimulus Just
now being considered; will work but slow
to implement and slow to have effect. (3) Arrange
long-term financing for steps #1 and #2 with our
foreign creditors – Unacceptable to our leaders at
this time.
(4) Can introduce Islamic banking system in Sri
lanka.
REFERENCES
Ajith Nivard Cabraal, 2008. The Present Global
Financial Crisis and Sri Lankan Economy.
Governor of the Central Bank of Sri Lanka, 10
October 2008, Pp 08.
Annual Report 2008 DIALOG TELEKOM, Sri Lanka
an Economic Overview.
John K.S. Chong. 1997. University of North Dakota,
Grand Forks, North Dakota, USA ,Donald R.
Escarraz, University of Central Florida, Orlando,
Florida, USA.
www.imexport.gov.lk
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... The term economic crisis has become a domestic term during the recent times as the entire world went into chaos after the COVID-19 pandemic. As per Loukis et al., (2020), , an economic crisis refers to a situation with significant contradictions that can result in inflation, unemployment and other negative economic conditions for the economic agents.Furthermore, an economic crisis creates a special scenario where the customary financial practices may be revoked to suit the changes in the economic environment (Shibly, 2013). The empirical studies suggest that cognitive load determines the comprehensiveness of the learnings as well as the ability of an individual to retain the learnings in the long-term memory (Sweller et al., 2011). ...
... Moreover, during an economic uncertainty, with the changes in the financial market due to inflation and currency depreciation as well as the implementation of reactionary policies cause the investment environment to become more complex (Shibly, 2013;Rathnayaka et al., 2022;Lee & Syah, 2018). During the height of the economic crisis in Sri Lanka the banking and finance institutions faced fluctuations in monetary and fiscal policies (Cooray & Rankaduwa, 2022). ...
... Hence, in the wake of the civil protests the economy plummeted to its lowest ebb, due to approximately 12-hour long power cuts during the day, import restrictions over 2000 items causing shortages of raw materials for businesses and the food inflation soaring to recorded highest levels as depicted in Sri Lanka is now reported to be in the path to recover from the economic crisis, depending on the country's ability to revamp its foreign exchange reserves and to restructure its debt to a sustainable level (Kandewatta, 2023). However, the volatile financial markets and the barely stable political situation are causes for economic uncertainty, which increases the risk for investments (Yindok, 2021;Shibly, 2013;Nguyen & Nguyen, 2020). However, when such volatilities arise, it negatively affects the investment decisions of individuals as they prefer investments with less risk, less complexity and adopt a conservative investment behaviour (Schneider &Troeger, 2006;George et al., 2022). ...
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Developing a Theoretical Model for the Role of Cognitive Load and Financial Literacy on Investment Decisions during an Economic Crisis: A Conceptual Paper based on Sri Lanka Abstract Purpose: The economic quagmire the entire world was engulfed in, due to the turmoil caused by the COVID-19 pandemic, and the subsequent political unrest experienced in the country, created a severe economic crisis in Sri Lanka in 2022. Hence, this concept paper envisions developing a theoretical model to assess the cognitive load and financial literacy on the investment decisions during a severe economic crisis. Design/methodology/approach: This paper while proposing a deductive approach under the positivist epistemological research philosophy, develops a theoretical model based on the Attribution Theory (AT) as the domain and the Cognitive Load Theory (CLT) as the choice of method, to make investment decisions during a severe economic crisis as the phenomenon. Findings: Based on the existing literature, it was theorized that the cognitive load in terms of the intrinsic, extraneous and germane load impact the financial literacy of investors. The financial literacy and economic uncertainty are classified as internal and external controls that affect the investment decisions as per the AT. Originality: This paper proposes a novel theoretical aspect on investment decision making, captivating the economic catastrophe that quivered all economic foundations in Sri Lanka. Keywords: Cognitive load, Financial literacy, Inflation, Currency depreciation, Investment decisions, Cognitive Load Theory, Attribution Theory
... The term "economic crisis" encompasses situations where financial institutions or assets experience significant devaluation (Shibly, 2017). It creates an uncertain context that profoundly influences people's outlook on life and their assessments of their work environments (Markovits , Boer, & Van Dick, Economic crisis and the employee: The effects of economic crisis on employee job satisfaction, commitment, and self-regulation, 2014). ...
... It creates an uncertain context that profoundly influences people's outlook on life and their assessments of their work environments (Markovits , Boer, & Van Dick, Economic crisis and the employee: The effects of economic crisis on employee job satisfaction, commitment, and self-regulation, 2014). Examples of such crises include stock market crashes, currency crises, financial bubble bursts, and sovereign defaults (Shibly, 2017). In Sri Lanka, the economy has been grappling with a severe crisis, marked by rising inflation, depreciating Sri Lankan Rupee against the US Dollar, and a host of economic challenges (George, George, & Baskar, 2022). ...
... The term "economic crisis" encompasses situations where financial institutions or assets experience significant devaluation (Shibly, 2017). It creates an uncertain context that profoundly influences people's outlook on life and their assessments of their work environments (Markovits , Boer, & Van Dick, Economic crisis and the employee: The effects of economic crisis on employee job satisfaction, commitment, and self-regulation, 2014). ...
... It creates an uncertain context that profoundly influences people's outlook on life and their assessments of their work environments (Markovits , Boer, & Van Dick, Economic crisis and the employee: The effects of economic crisis on employee job satisfaction, commitment, and self-regulation, 2014). Examples of such crises include stock market crashes, currency crises, financial bubble bursts, and sovereign defaults (Shibly, 2017). In Sri Lanka, the economy has been grappling with a severe crisis, marked by rising inflation, depreciating Sri Lankan Rupee against the US Dollar, and a host of economic challenges (George, George, & Baskar, 2022). ...
... However, an economic crisis arose due to government mismanagement of finances unrelated to COVID-19. The term economic crisis is used to describe a wide range of situations in which financial institutions or assets experience a sudden and significant decrease in value (Shibly, 2013) 1 . Sri Lanka has faced its worst economic crisis, which has had a devastating impact on its citizens (Subhash, 2022) 2 . ...
... However, an economic crisis arose due to government mismanagement of finances unrelated to COVID-19. The term economic crisis is used to describe a wide range of situations in which financial institutions or assets experience a sudden and significant decrease in value (Shibly, 2013) 1 . Sri Lanka has faced its worst economic crisis, which has had a devastating impact on its citizens (Subhash, 2022) 2 . ...
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The economic crisis in Sri Lanka has significantly impacted the country's education system, with schools facing challenges in maintaining regular operations and providing quality education to students. This study examined the strategies employed by school principals to ensure teaching and learning amid the crisis. Twelve school principals were interviewed, representing 7 Sinhala medium and 5 Tamil medium schools. The findings highlighted the following challenges schools face: low attendance of students and teachers, learning loss, disruption of remote learning activities, malnutrition among students and psychological issues among students, teachers, and parents. Despite these challenges, the study found that school principals worked hard to ensure that teaching and learning continued during the economic crisis. They had implemented several strategies to address their challenges, including flexible attendance policies, temporary accommodation for teachers who travel far from school, and sharing meals with poor students. The study concludes that school principals have played a critical role in ensuring that teaching and learning continued during the economic crisis in Sri Lanka. Their strategies have helped mitigate the crisis's impact on students and teachers, but more support is needed from the government. The study recommends that the government should consider to provide the following support to schools: increasing public transport at low cost for the students and teachers for regular attendance; resuming Nutrition support for students; increasing salaries for teachers; Strengthening remote learning initiatives by reducing the price of digital devices and expanding internet access; providing psychological support for students and teachers; and prioritization of timely; and Long-term planning to build resilience in the education system. By implementing these recommendations, the government can help ensure that the education system in Sri Lanka can withstand future economic shocks.
... As the crisis worsens and spreads rapidly, it affects the entire economy, transforming it into an economic crisis. The term "economic crisis" refers to a wide range of scenarios in which some financial institutions or assets lose a significant portion of their value (Shibly, 2013). Sri Lanka's economic crisis began due to interconnected factors like tax cuts, money creation, organic farming, Easter bombings, and COVID-19's impact (George et al., 2022). ...
... Argentina also had an economic crisis in 2001, which was caused by frequent structural changes in the government with a "tragicomic spectacle of a succession of five presidents taking office over a mere ten days" (Burke-White, 2008), unstable political and economic situations, and fixed exchange rates. Another first sign of a global economic crisis began in 2008 in the U.S. housing market (Shibly, 2013). It affected not just the US government; it dragged in many European countries as well as Asian countries (Helleiner, 2011). ...
Conference Paper
The construction industry is highly diverse and interconnects with many other industries The industry generated job opportunities to many and a significant economic multiplier. However, it was observed that an economic change in the country affects the industry adversely. The depletion of foreign currency reserves has significantly impacted Sri Lanka's construction industry in the recent past, from 2019 to date. Many stakeholders are currently encountering many issues, and as a result, many construction projects are in temporary shutdown. This study aimed to investigate the impact of foreign currency depletion on the Sri Lankan construction industry. The data collected from 15 semi-structured interviews conducted among professionals from the construction industry who work under contractors and professionals from the finance industry who are involved in the economic sector. A detailed literature study was undertaken to determine the causes and effects of the depletion of foreign reserves and qualitative semi-structured interviews were used to identify the positive and negative effects of the depletion of foreign currency on the construction industry. As a result, the findings featured results such as financial issues, unemployment, and frequent price escalation as severe impacts on the industry. The discussion also highlighted the strategies which are already imposed and suggested by the government and construction organisations. It included, implementing more foreign-funded projects, outsourcing new contracting or consulting overseas projects and expanding the export industry. Finally, the paper reveals the possible remedial strategies to minimise the impact of foreign currency depletion in the future.
... This brings us back to the Russian conference. We would be qualified to join the "BRIC block" now that Sri Lanka has been granted delegate status at the Shanghai Cooperation Organization if Sri Lanka could successfully demonstrate its capacity as an emerging economy by developing and implementing this new economic model that is in line with "Mahinda Chintana" policies [11]. ...
... Literature identifies an economic crisis to be a situation where the economy faces considerable contradictions which result in negative economic outcomes such as inflation and unemployment (Loukis et al, 2020). Such outcomes combined with the escalating uncertainty of the economy lead towards changes in the financial and economic transactions to accommodate the aforementioned economic shifts (Shibly et al. 2013;Balagobei & Prashanthan, 2021). Hence, in consideration of the banking sector as a principal player in the financial institutions of an economy, it was identified that commercial banks are struggling to maintain their revenue from interest payments received through loans and advances extended for the banks' customers as more and more customers are refusing to obtain bank loan facilities due to the dire economic outlook. ...
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This research investigates the impact of low financial literacy and conservative corporate behavior on the demand for loans and advances, specially during economic uncertainties. The findings offer insights for enhancing strategies among banks, policymakers, and socioeconomic sectors to effectively stimulate loan demand in response to these challenges.The literature review revealed that the conservative behavior of corporate clients and the low financial literacy and knowledge results in a low demand for business loans. Empirical studies which address the impact of economic uncertainties on banks identify that the living standards of the citizens affect the ability of individuals and corporate clients to obtain loans from banks because as a financial intermediary, banks are more likely to retain excess liquidity instead of giving out loans due to the risks in the uncertain environment. Literature also suggests that the demand for loans decreases, it creates non-remunerative excess liquidity in banks where the banks would not receive a return from the liquid assets held at the bank. It was identified that during times of economic uncertainty, the demand for loans and advances of banks are drastically low when compared to the demand during stable periods of time. A qualitative study was conducted in Sri Lanka, involving interviews with bankers. The subsequent thematic analysis highlighted several key findings. First, it revealed that low levels of financial literacy are linked to a lack of knowledge and training in financial matters. Second, it indicated a preference among individuals for informal credit sources, rather than formal ones. Additionally, the study found a pressing need for professional financial services. Furthermore, the analysis showed that conservative behavior during periods of economic uncertainty tends to discourage investment decisions, create uncertainty in working capital requirements, and introduce volatility in hiring employees. Consequently, these factors collectively contribute to a reduced demand for loans and advances. This comprehensive analysis explores how low financial literacy and the conservative financial behavior of corporate clients determine the demand for loans. This examination not only provides a deeper understanding of the challenges but also offers valuable insights into areas where banks can enhance their strategies. By improving their approach, banks can effectively stimulate greater demand for loans and advances. These findings hold significant implications not only for financial institutions but also for policymakers and various socioeconomic sectors.
... The foreign exchange must be saved at this time if we are to avoid financial ruin. Because of the rapid development of information technology, some argue that there is no place for nationalism in contemporary times (Shibly, 2013). This assertion is not being challenged. ...
Conference Paper
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The economic crisis had diverse impacts throughout the world. Countries that relied heavily on foreign markets for commerce and finance were affected by the global contagion more than the countries that relied less on them. However, there is minimal variation in the world economy with small enterprises, which are limited in product range and the ability to downsize. Small and medium-sized businesses are significant in the sourcing process of both exporting and non-exporting major sectors due to strong backward connections or widespread engagement in the supply chain. In contrast, even if generally considered less credible and more credit dependent than large companies, the credit shortage of small businesses intensified the financial crisis. Due to the small size, small businesses and enterprises were more susceptible to the financial crisis. A random sampling technique was used in the quantitative study to collect data from a sample of 180 small and medium enterprise businessmen. The study revealed a significant impact on the sustainability of Small and Medium Enterprises (dependent variable) by inflation and perceived political relations (the two independent variables).
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Background: Although indications suggest that Sri Lanka is facing serious mental health challenges within its diverse populations, the extent of the problem is poorly quantified and even tools required to explore its nature are unavailable. The present study tests the psychometric equivalence of the PHQ-9, a widely used measure of depression, across two translated versions to Sinhala (Sinhala-English) and Tamil (Tamil-English) languages. It also tests equivalence across different demographic groups. Methods: The study uses data from a nationally representative sample of 6,444 individuals, from the 2018-19 Wave 1 of the Sri Lanka Health and Ageing Study, who completed the PHQ-9 along with other measures of health and wellbeing. For analysing the data, standardized process of measurement invariance testing was performed using multigroup confirmatory factor analysing technique. Results: Results indicated equivalence across the two translated versions, and across gender, ethnicity, level of education, and socioeconomic status. Configural, scalar and strict invariances were established successfully for each variable. Conclusions: The translated PHQ-9 tools were found to perform psychometrically similarly across diverse populations in Sri Lanka. These versions of the PHQ-9 can therefore be used for screening of depressive symptoms and research purposes in Sri Lanka irrespective of population characteristics in terms of language, gender, ethnicity, level of education or socioeconomic status without concerns over whether they are equivalent.
The Present Global Financial Crisis and Sri Lankan Economy. Governor of the Central Bank of Sri Lanka
  • Ajith Nivard
Ajith Nivard Cabraal, 2008. The Present Global Financial Crisis and Sri Lankan Economy. Governor of the Central Bank of Sri Lanka, 10 October 2008, Pp 08.
University of North Dakota, Grand Forks
  • John K S Chong
John K.S. Chong. 1997. University of North Dakota, Grand Forks, North Dakota, USA,Donald R.