arjuna mahendran : the latest financial crisis and sri lanka speech by mr arjuna mahendran, governor of the central bank of sri lanka, at the international research conference, colombo, 7 december 2015. * * * professor yi fu lin, dr. harsha de silva, distinguished delegates, ladies and gentlemen. welcome to this 8th research conference by the central bank of sri lanka. i must congratulate dr. nandalal weerasinghe and his colleagues who have developed this tradition which in no small way has established the central bank of sri lanka on the international research map as a meeting place for the profound minds of several leading academic and banking institutions. this conference itself is no small feat to have organized given that we have participants from several parts of the world in europe and asia including several areas that we have very strong relationship with as a country, and i think this is a great testimony to the continuing tradition that we have evolved in the central bank in terms of creating another center of excellence in sri lanka. in my opening remarks i thought i would perhaps take a leaf from professor lin ’ s commentary just now, and perhaps adapt sri lanka ’ s situation in terms of the structuralism or the lack of it that professor lin discussed. now when you look at the total economy, we have in the last five years gone through a fairly challenging period. as professor lin said we had the great recession of 2008 and its immediate aftermath what you found was that three strands of relatively new economic activism manifested themselves. in the first instance you saw a huge pump - priming effort by the people ’ s republic of china, which in its wake created perhaps the strongest commodity price boom that we have seen in recent history. that i think was a key take away from that period and china to some extent prevented the world from falling into a depression by stimulating its economy, and as professor lin has now elaborated to us, it falls in line with his perception that in times of recession developing countries are well - advised to go ahead and really stimulate domestic infrastructure construction etc. to take on the slack caused by international events. secondly we saw the major central banks of the world, that includes the united states, the europe, the united kingdom, japan and switzerland, creating money on an unparallel basis which for my calculations to date add up to about 8 trillion dollars worth of new money created in the last 5 to 6 years. that is significant. that ’ s the second strand that emanated

borrowers in the system – do they then have all the gear to stimulate consumption and create another repeat cycle of that export - led boom that really lifted countries like china and other big asian exporting economies out of the low income status that they had enjoyed for several decades. that to me is a very relevant question that we have to ask ourselves at this conference. have we got to then look at a different model and that ’ s where i think one key element of the international economics situation is very important to understand and that has to do with the emergence of information and communication technology as a principal driver of growth, specifically in the services sector of our economies and what have we used in that space to stimulate the growth impetus that previously resided in manufacturing. now we have to also understand that the manufacturing space has largely converged in china. the chinese have built an international value chain over the last 30 to 40 years which is unparalleled in terms of its complexity and its far reaching nature and unless small countries like sri lanka participate in that value chain we in a sense are losing out on a tremendous opportunity. i put it to you that sri lanka still has not integrated itself adequately in that international value chain which the chinese has built up in the last 30 to 40 years effectively, and that is why we have effectively not fulfilled our growth potential in the last 5 years since the cessation of the internal civil conflict in this country. the second point i like to make is that we rely a lot on foreign savings for the growth of our economy. this a peculiarity of sri lanka that we resemble countries like phillipines and mexico, in a sense that we have large diasporas living overseas who are fairly high income earners relative to our levels of income in this country and i just asked dr. weerasinghe, our national savings rate is about 25 percent, and of that perhaps 6 to 7 percent is accounted for by international savings component of our diaspora. that is a significant number ; it means that we can afford investment rates of 26 to 28 percent perhaps even 30 percent in the medium term if we marshal these resources effectively and then create our own growth impetus which will engender a sustainable growth path and at the same time integrate ourselves with this global value chain that the chinese have constructed very effectively over the last few decades. but there are several challenges that face us in the near term. first of all we have to watch what the american monetary policy makers will do in the next few weeks.