The President and the Central Bank who were vulnerable amidst COVID-19

The President and the Central Bank who were vulnerable amidst COVID-19

27 June 2020 12:47 pm

In the present, everyone is much vocal about the financial Apex Body of Sri Lanka, the Central Bank.That is, because President Gotabaya Rajapaksa on a recent occasion had levelled criticism over its senior officials. One could imagine that the President had levelled these allegations on the purpose of reviving the crashed down economy through the fiscal bodies of the country as the Head of State. However,many are unaware of the contributions the Central Bank of Sri Lanka (CBLS), a supreme body, had provided to the country’s economy and the field of finance. Many believe that the CBSL is merely a mint printing money. Therefore, we once again met Mr. Vincent Mervyn Fernando, a former director of the
CBSL, a senior economic specialist an author to 65 books,
in learning the contributions of the CBSL amidst the COVID-19 crisis.

Why did the President address the Central Bank officials in a criticising manner?

One of the hot topics everyone’s vocal about these days is the President’s comments on the Central Bank. This, I believe, was mainly due to the impacts of the Coronavirus Pandemic. Through Coronavirus,the entire world had to face with two crises. One was the health epidemic, and the other was the Economic meltdown. The Pandemic that spread through 220 countries and administrative areas around the world infecting over 9.6 million people and killing about four hundred and eighty five  thousand people is yet to be eliminated, as we speak at this moment. But this pandemic that had infected 2010 people killing 11 (as of June 24, 2020) in Sri Lanka has been controlled at most. Therefore, these efforts on the
contributions by the Health Sectors, the Security Forces, the Police and other relevant bodies led by the President, the Prime Minister and the Government collective have been appraised by world leaders, as well as the World Health Organization.

But it is quite clear that the economic and financial challenge upon us awakened with the Coronavirus Pandemic is what we struggle to pass through. Because this situation is even affecting the world powers in a severe magnitude, we too are seriously affected. On the other hand, given some of the incidents - many of which were affiliated with the Financial Sector - took place in the country during the previous month negatively affecting the people as well as the upcoming General Election, this leads us to address the importance of the CBSL. The assassination of the Chairman of the Three-Wheeler Drivers’ Association based on a conflict involving leasing, the closure of one of the oldest fiscal bodies in the
island - The Finance Company (a side note should be added that 93% of the clients were protected under the Deposit Insurance Scheme initiated by the CBSL in 2010), problems with properly obtaining some of the concessions promised for entrepreneurs and leaseholders through banks, problems with obtaining working capital financing promised for crashed down businesses at a 4% interest, to name a few. Because the President may have been convinced by certain parties that the CBSL should be responsible for everything aforementioned, he must have raised his voice in instructing the CBSL officials with genuine intention of relieving the people by filling the gaps. This has been obvious from the below
statement delivered by the President before the CBSL officials. 

“All I have to say is, please, should you choose not to accept what I say, submit your plans by tomorrow morning. You tell me on how do we rise from this economic situation; what would be your ideas; on how economy should be strengthened; on how help would be given to Small and Medium Scale Enterprises.”

Looking at this request alone gives us the idea that the President has sought something from the Central Bank’s Monetary Board to revive the country.

What is this Monetary Board, if you could explain to us please?

The Monetary Board is a board fixed for a six-year period comprising five members, among whom three are appointed by the President and the other two, the Governor of CBSL (Chairman) and the Secretary of the Treasury, as per the recommendations of the Finance Minister. They cannot be dismissed unless should there be anyone completely disabled or an illegal act that is detrimental to the objectives of the
CBSL is committed. The Monetary Board is given the autonomy to act beyond political influence. When the most recent incident addressed in this article had happened, two of its members had already been dismissed (for reasons we do not know yet). The remaining three members are also officials appointed by the present government. This is suggestive that those who had been appointed by the President himself had failed to approve something he had requested. Calling them in, the President had said that should they choose not to approve what he had to say, the Monetary Board should be providing alternatives the very following day. However, nowhere did we see anything approved by the Monetary
Board the following day. Only two days later, what the President had sought was approved, according to reports.

What did the President ask from the Monetary Board? Why was it not approved?

I too queried this from some of the most senior officials in the CBSL who happen to be my friends. I believe that what he had told me should be disclosed before the whole country to avoid giving the wrong impression on the CBSL.

Forgive us for interrupting. Can you please tell what is the Central Bank?

The Central Bank of Sri Lanka (CBSL) was established in August 28, 1950 under Article 58 of the Monetary Law Act No 58 1949. According to the Act, the CBSL was expected for four objectives. These four objectives can mainly be divided into two categories, “Stability” and “Development”. In compliance with the amendments brought in to the Monetary Law Act in 2002, the objectives of the CBSL was narrowed
down to two. They are;
1.Economic and Price Stability
2.Financial System Stability

Can you explain to us about these two objectives in a manner everyone can understand?

The Price Stability involves with the continuity of the low Rate of Inflation affecting the country’s economy. When the inflation rate is maintained at a lower value, affairs pertaining to the production, the savings,the investments, and the consumer affairs can be planned efficiently. The CBSL has even achieved a record in terms of its first objective, the Price Stability. When the open economic policies were first introduced in the dawn of the 80s, the highest inflation rate since independence, 26%, was reported. In the decade of 1980 – 90, seven inflation rates of two digits were reported. In the decade of 1990 – 2000,there were four two-digit inflation rates, and in the period of 2000-2008, five two-digit inflation rates. In the backdrop that Mr. Ajith Nivard Cabraal was appointed as the Governor of CBSL under the government led by President Mahinda in 2006, and the Civil War was ended and peace was delivered in 2009 by the commitment of current President Gotabaya Rajapaksa, we were able to main a single-digitinflation rate (2009 = 3.4%, 2010 = 6.2%, 2011 = 6.7%, 2012 = 7.6, 2013 = 6.9%, 2014 = 3.3% 2015 = 0.9%, 2016 = 4%,2017 = 6.6%,2018 = 4.3%,32 2019 =4.3%).

The CBSL was able to maintain a single-digit inflation rate even during the Good Governance Government of 2015 – 2019. That being said, we hardly get to see any appraisal on the CBSL for its commitment to secure its main objective, the Price Stability. We feel sorry for it.

Although the Price Stability Objective was achieved, the CBSL was unable to achieve the Economic
Stability, was it not?

Good question. Although the Price Stability, the chief ingredient of setting the Economic Stability of the Country, was achieved - which implies that the Fiscal Policy ought to successfully implemented – should it not be continued successfully, along with public service facilities not being provided and the occurrence of political irregularities and corruptions, the Economic Stability could be broken down. With the establishment of the Open Economy in 1978 under Mr. J.R. Jayawardena, the Economic Growth Rate in the first eight years had marked 8.2%, 6.3%, 5.8%, 5.8%, 5.1%, 5.0%, and 5.1%, and 5.0% in order,keeping the value above 5%. But the worsening of the ethnic struggle in the country and the terrorist activities had dropped down this value. Then the Economic Growth Rate had reached up to 6% since President Mahinda assumed Office in 2005 in the period of 2006 – 2009, and from 2010, there were three speedy economic revivals (2010 = 8%, 2011 = 8.4%, 2012 = 9.1%). However, in 2013, it had dropped down to 3.4%. The Economic Growth Rate had once again risen up to 5% in 2014. For the first time in history, the Annual Growth Rate was gradually dropped (2015 = 5%, 2016 = 4.5%, 2017 = 3.6%, 2018 = 2.3%) under the Good Governance Government, the CBSL’s Economic Stability objective was severely challenged in the period of 2015 – 2019. This was further worsened in the occurrence of the Easter Sunday Genocide and the COVID-19 Crisis in 2020. In this backdrop, the Economic Growth of Sri Lanka is likely to drop down to a negative value of -1.5% (similar to that during Lady Chandrika Kumaratunga’s governance in 2001). The Global Economy is set to report a negative value of -3% in the wake of the COVID-19 Crisis. On this occasion, there is likelihood that the per capita income of Sri Lanka may drop down to Rs.40,000. It the President’s highest interest on saving the country from this negative situation. This was why the President had told the CBSL officials that should they choose not to accept his proposals, they should be coming up with alternatives. But the CBSL should also be thinking about their next prioritised objective the Financial Stability, coincided with the Price Stability and the Economic Stability.

What is this “Financial Stability”? Has the Central Bank of Sri Lanka ever indicated such progress in terms of it?

The Financial Stability is the implementation of the CBSL’s Fiscal Policy in a manner by which the country ought to be recovered from a crisis occurred in the Banks and the Financial Markets. Otherwise, there could be financial crises. The financial crisis of the Eastern Asia in 1997 and the global financial crisis in 2007 are best examples. For Sri Lanka, they were the downturn of the economic wellbeing since 2015,the meltdown amidst the Easter Sunday Genocide on April, 2019, and the one with the COVID-19 Pandemic to name the worst, spawning a severe crash in the world, as well the banking sector. The CBSL is forced to tackle this huge calamity. The President too wishes to recover from this disaster
through the CBSL. This would be a crucial moment in which the President, the Governor, the advisers to the President, the members of the Monetary Board, the CBSL authorities, the President’s Secretary and the Prime Minister’s Economic Adviser should be united as one.

Was the central bank sleeping after the presidential election of late 2019, when a new president and a caretaker government and Sri Lanka suffered from the Covid 19 disaster?

Actually, one who listened to the whole story can understand that the President's utterances of the Central Bank officials were 'sleeping' did not mean that there is no any use of them. He said this in response was about The Central Bank taking a short time to complete a request which was made on 12th June that has been approved by the cabinet on 3rd  June.

In fact, several indicators can be used to analyze the huge role the Central Bank has played in bringing about the stability of the country's financial system. You can summarize all those indexes as "CAMELS".In all these indicators, the situation in Sri Lanka's banks is as follows.

1).C = Capital Adequacy

Even if the core capital of a bank is calculated as a percentage of the risk weighted assets, the ratio should be 5%. The banking sector in Sri Lanka will maintain a 13% growth rate in the financially depressed economy of 2019 and maintain the bank's total capital ratio at 16.5%. Sri Lanka's banks are in the forefront of capital adequacy as the ratio is 10%.

2). A = Assets Quality

This is measured on the gross and net NPL ratios of banks. The Gross Non-Performing Loans (GNPL) and Net Non-Performing Loans (NNPL) of the banks in 2017 were as follows:

This indicates that the percentage of non-defaulting loans taken by banks has increased steadily over the past three years. Therefore, it is reasonable to think twice about lending loans under Covid 19. Therefore, Without the Central Bank guarantee banks are hesitant to issue working capital loans at 4% interest, which is required to be provided under Covid 19 without collateral.Banks are not lending these days because they do not have liquidity. It is because of the Fear of being able to recover the loans given. This is also the backdrop to the controversy between the President and the Central Bank.

3).M = Management

The government appoints the people in the big chairs of the banks to get their things done quickly.But the people in those big chairs have to agree to a panel's decisions. If not, conflicts between the government and the bank would arise.

4). E = Earning

This measures the profitability ratios of banks. Return on Equity (RE), Return on Assets and Return on Equity from 2017 are as follows:

This indicates that banks' profits are declining.

5). L =Liquidity

According to the Banking Act, every commercial bank has a liquidity ratio of 20% (ie, 20% of the proceeds should be kept without borrowing) at present between 35% and 40%. In addition, every commercial bank must keep a certain percentage of its deposits in the Central Bank as the Statutory Liquidity Rate (SRR). After the arrival of Covid 19, the Central Bank has reduced the SRR by 5% to 4% in March 2020 and reduced the SRR by 65% ​and Rs. billion 65 has been released to the local money market. On June 16, 2020, the 4% SRR rate was reduced to 2% and another Rs. 115 billion was released to the local money market. This has also increased the ability of banks to lend to businesses at this rate.

According to the analysis so far, banks have enough capital but the non-performing loans (NPL) ratios and low profitability have led to the need to be cautious about lending to businessmen in the face of Covid 19.

Finally tell us how the Central Bank of Sri Lanka during Covid19 crisis - in the first six months of 2020 used the tools of the Central Bank for the government, the business and the people of this country.

This is equivalent to a year's budget deficit. In addition, the Central Bank reduced interest rates from time to time.

Due to these rate reductions, depositors' interest rates in Sri Lanka have been greatly reduced since the beginning of 2020, which could have discouraged deposits. According to reports, many are now taking back their deposits and getting rid of pawned jewelry. Gold jewelry pawning has been released from branches of People's Bank for about Rs. 5 billion.

An incident which took place in Wadduwa reports that those who have signed up for a loan to their friends are threatening to go to the banks to cancel the collateral for fear that their friends will not pay the debt. It is at this time that the Central Bank is aware of the situation and the government is coming forward with a proposal to increase the 4% lease amount to Rs. 150 billion from the cabinet approval on June 6 and request the Central Bank to act on June 12.

The closest struggle begins with the disagreement over how this request should be met. The central bank says that banks do not need more money and they already have excess liquidity of over 100 billion. They do not allocate that money to 4% working capital lending and deposit 5.5% SDFR money into the central bank itself and get an additional 1.5% and 100% % Say they use their money to be safe. If another central bank makes money, that money will be deposited. Therefore, it is necessary to address the cause of this lending of capital funds.

That is, when the Central Bank states that 50% or 70% of the loans are guaranteed by the Central Bank under Section 108 (1) of the Monetary Law Act, most of the Monetary Board is saying that the money will be fulfilled. They were asked to print the cards under Section 83. No guarantee required. This story is reported to the President as the bad news that the Central Bank is unwilling to give more money.

The President has spoken harshly to the bank officials. But the President and the Central Bank officials were embarrassed at the end of the scandal. But in the end we can see that the President is not wrong and the officials are not wrong. The lack of accurate reporting of information only contributed to the offense. However, the President has requested that the Central Bank agree to provide the remaining Rs.billion 120. But whether the money will be able to fulfill the President's desire to reclaim the country is ultimately dependent on how efficiently the banks are able to lend to those who have applied for working capital requirements of 4% interest.

In addition to what has been said so far, the President must be happy to deliver another important and fresh message to the Monetary Board of the Central Bank of Sri Lanka, to economists and heads of departments. He said that although the Central Bank is doing its traditional work efficiently, new research is needed to come up with new proposals to rebuild the Sri Lankan economy in the face of the Covid 19 plague, which felt the entire world by 100 years. Accordingly, it is necessary to look into new schemes to recruit fallen businessmen and to look for new measures to prevent people from getting into trouble with illegal financial institutions.There is a person and an institution that come to mind
when I mention these. Former Central Bank Governor Ajith Nivard Cabraal is the man. He has informed the whole country about the eight new schemes which he has proposed to rebuild the economy of the Covid 19. The attention of the President, the Prime Minister and the Governor of the Central Bank should be immediately taken to make these proposals a success.
Any new suggestions from the Central Bank would be appreciated. Therefore, it is necessary to think that the time has come for everyone to come together and seek the support of all opposition parties, regardless of personal differences and personal jealousies.

In addition to this we have been talking about public sector institutions. In addition, I was attracted to a very special institution that invited me to a special post, it's because they are doing their job silently,politically, honestly and respectfully helping to save the country from falling due to the crisis. The company is known as the "Colombo Business Association" it has a massive business plan for 2020-2022 promoting local business and export business (export, import and tourism), not just for Colombo. It is my final request that the attention of the responsible parties of the Government (President, Prime Minister, Governor of the Central Bank) be addressed. Finally, I would like to state that a time has come for all to support the economic recovery of the fallen country.