No more ‘no ways’ for Dubai this time

Is the Dubai crisis the second wave of the economic recession? Many have this question in their minds and the doubtful situation has led the emerging markets to plunge more than 6% during the last few weeks.
Though it is premature to jump into the conclusion that seeking of a six-month extension by the State-run, Dubai’s major development engine, Dubai World, to pay its bills would start the second wave of the global economic crisis, it certainly points out that the recession is not over and there could be more complications in the near future.
Now, let us come to the real question. Whether the financial woes of Dubai have any bearing on Sri Lanka? Will the authorities give another ‘no way’ this time too? When we asked the same question during the global recession the authorities said ‘no way, that we will be affected by it’ but later wrote an annual report which linked all the negative news in it to the global recession!
It was only when the export earnings started to drop and foreign investors started withdrawing their investments from the Colombo Stock Exchange, the authorities realised that, Sri Lanka was more integrated to the world economy than we thought and perhaps than we wanted to see.
As a result of the global recession, a number of local factories and various kinds of manufacturing plants had to close down and many workers lost their jobs.
This was a good example where the authorities had not appraised the situation paying careful attention the matter required and giving the public the wrong picture that Sri Lanka’s economy is immune of world recessions. The only advantage Sri Lanka had was our banking system being conservative never opened their metal safes to the toxic assets created by the property bubble in the United States.
Perhaps the Sri Lankan authorities were a bit reluctant to give the required attention to the recession because they may not have wanted to create unnecessary panic at the market place. Whether this was done purposely or due to sheer lack of foresight, the example the authorities have set was not at all impressive.
Taking this and the current context into account, it is the responsibility of the authorities to do an unprejudiced assessment, thinking of the worst scenario—Dubai started the second wave of the financial crisis which would have the capacity to overwhelm the Great Depression in early 1930s.
If the going down of the Dubai World is the beginning of the second wave, what are its implications on Sri Lanka.? What if Dubai World kicks off a contagion that will devastate the whole Middle Eastern Region?
It is already reported by the Dubai and other foreign media that if the Dubai World couldn’t resist the crisis, a number of foreign workers would have to return to their home counties.
If the Dubai crisis is followed by a contagion, then Sri Lanka would have to face a whole lot of problems emanating from the workers it has sent abroad to earn foreign currency. Sri Lanka last year received slightly over US$ 3 billion as remittances from these workers who toil in Middle Eastern countries.
Currently, remittances are the biggest foreign currency earner for the country. If it was not for the remittances, Sri Lanka would have been in serious trouble managing its foreign reserves while fighting the war with the LTTE.
If Dubai could not keep the crisis in its compound and treat it without letting it to spread to the region, Sri Lanka does not need to fret and the authorities can sing the song ‘no way.’ But, if the crisis goes beyond the domestic boundaries of Dubai there starts the real global economic crisis for Sri Lanka.
As well as the Sri Lankan economy, a lot of families in Sri Lanka are dependent on the money sent by their family members who are working in Middle Eastern countries as housemaids, brick layers, drivers etc. Therefore, if the flow of remittances is disrupted, a number of social issues may raise their heads along with the economic problems.
Another area Sri Lanka will have to pay her attention could be the export of tea. Nearly half of the teas exported from Sri Lanka are currently going to Middle Eastern countries and Dubai is the point of transit for Sri Lankan tea.
“Dubai, only being a transit point, may not pose a threat to tea exports. But, if the problems in Dubai spread to other Middle Eastern countries, the tea exports may get affected,” a tea industry stakeholder said.
Currently, Dubai is planning to issue bonds worth of billions of dollars to come out of the crisis and there were media reports which said that Abu Dhabi may bail out Dubai.
Thirdly, a lot of oil money of the Middle Eastern countries has been invested in emerging markets and these moneys could be withdrawn to settle their problems back at home, if the Dubai crisis goes beyond its borders.
Taking all these into consideration, it is our request from the authorities to asses the situation carefully without getting comfortable with pre-conclusions.