Central Bank 2014 Road Map under scrutiny

  Published : 12:05 am  January 8, 2014  |  2,404 views  |  No comments so far  |  Print This Post   |  E-mail to friend
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  • Key insights shared by experts at first-ever public discussion on monetary authority’s key policy document at joint forum organised by Ceylon Chamber of Commerce and Daily FT

By Cheranka Mendis
At a high-level discussion on the recently-released Central Bank Road Map for 2014, Governor Ajith Nivard Cabraal attempted to highlight the salient points of the policy document while answering inquiries on the various measures that were highlighted in the document.
Organised by Ceylon Chamber of Commerce and Daily FT, the discussion held at Ramada Hotel on Monday, brought into focus thoughts and suggestions of business leaders and an economist, highlighting both the good and the bad of the eighth edition of the Road Map released on 2 January.
It was the first-ever public discussion on the Central Bank’s Road Map since it was first launched in 2007.


 Avoiding the middle income trap
In the country’s march towards expanding the local economy by US$ 100 billion within the next three years, pushing forward per capita income from an estimated US$ 3,282 to over US$ 4,000, the Central Bank’s Road Map 2014 covered the monetary and external sector policies as well as financial sector policies taken by the bank for 2014 and beyond.
According to the document, the conduct of monetary policy will be fashioned towards realising a sound medium term macroeconomic framework and a sustained real economic growth of over 8% in the medium term.
Diversification needed for sustained growth will continue to be based on the 5+1 hub concept with a steady pipeline of investments to assure energy security, development of skills for emerging sectors among others.
Cabraal assured that all steps and macroeconomic policies will be pitched towards avoiding the possible middle income trap which has hindered continued growth in a number of other nations.
He acknowledged that the economy in 2013 rebounded and is estimated to have grown by 7.2% as opposed to the original target of 7.5% and that the level of investment maintained at over 30% of GDP and the headline inflation declined to 4.7%, thereby enabling the achievement of the lowest level of inflation for the longest period (59 months) in the history of Sri Lanka.
The economy in 2013, having successfully responded to the economic stabilisation package that was implemented in 2012, enabled the country to move away from a decades-old vicious cycle of high inflation, high interest rates, low investor confidence, sluggish investments, low growth, high debt and high fiscal deficit to a virtuous cycle of low inflation, real interest rates, enhanced savings, regular investments, sustained growth, low debt levels and low fiscal deficits.
 New vision for banks to sustain positive outlook
He stated that while progression on the virtuous path would be continued, “to sustain the positive outlook of the economy, and to ensure financial system stability, the banking sector will need a new vision in the run-up to 2016, where at least five Sri Lankan banks will have assets of Rs. 1 trillion or more – with such banks also having a strong regional presence, a reduced number of banks as a result of mergers and consolidations, a large development bank that will provide a substantial impetus to development banking activities in the country and have substantially lower interest margins through increased efficiency and prudent assets and liabilities management, among others.”
The ‘new vision’ will require a strengthened financial sector, which is strong enough to steer Sri Lanka towards the goals set for 2016.
“In that scenario, the present banking structure will need some structural changes to ensure that banks and NBFIs will be equipped to play the required role in the envisaged US$ 100 billion economy.”
A number of measures have been marked towards achieving this, and the resulting outcomes will lead to what Cabraal referred to as a ‘new equilibrium’ in the banking sector in Sri Lanka.
Delivering a speech that exceeded an hour, the Governor outlined the economic progress and status made up to 2013 and its aspirations for 2014 and 2016.
Calling all investors
Commending the CBSL for formulating a Road Map that is geared to make the country’s financial base much stronger, Aitken Spence Deputy Chairman and Managing Director Rajan Brito expressed that the report is ‘meant for business’.
With the macro conditions outlining an 8.5% growth rate over the next few years, per capita income of US$ 4,000, steps taken to avoid the middle income gap and GDP increases, the Road Map if realised would be the perfect platform for investment to come into the country.
From an industrialist’s point of view, what would be focused on are the interest rate, inflation and exchange rates. With interest rates already coming down, inflation at single digits and the anticipation of the rupee getting stronger again, investors, particularly those from abroad, will have much scope to invest in the country. “This is very encouraging,” Brito said.
“Sri Lanka is one country where wages were shooting up by minimum 10-15%. When the world had a crisis, wages in the Western world were just put on hold, but in Sri Lanka we couldn’t do that. The very fact that the exchange rate is being held at these rates is excellent news for businessmen.”
Even though many are showing interest in the tourism and hospitality trade for investment, destination promotion campaigns will be able to boost the arrival numbers to be on par or at least close to the likes of Thailand, Egypt, Singapore, and Malaysia.
“We are glad that the infrastructure developments are taking place, and that they are promoting the hub concept,” he added. This, along with the road and highway connectivity, power projects, etc., would truly heighten Sri Lanka’s chance as a highly desirable investment destination.
Industrialist’s concerns
Brito also listed out a few concerns from his seat as an industrialist.
He noted that one of Sri Lanka’s biggest issues would be the lack of skilled labour and training. Noting that this affects his area of expertise as a hotelier more than other professionals, he acknowledged the Government for taking steps to reverse brain drain, encourage professionals to come back here, etc.
Noting that another concern was of possible overheating, he warned the envisaged low rates of interests could lead to an overheating as seen in the recent past. To prevent this, the real economy must be assessed well and taken into consideration. There is also doubt on the reduction in interest rates and its effects on the minds of the people, he added. “Has the market really taken in that interest rates are coming down or is there still doubt in people’s minds?”
CBSL should also be wary of external shocks, Brito asserted. “We cannot match up to Egypt, Thailand, etc., until we have economies of scale. Consolidation of banks will give more competitive rates and longer term lending,” he said, commenting on the consolidation of banks. “The only disadvantage from an industrialist’s point of view is if the five big banks will get an oligopoly, whether they will gang up together. But I think CBSL is vigilant enough to keep a tab on the rates and that should hopefully control it.”
 Banking and consolidation
Even from the view of a banker, the HR perspective to embrace staff to encourage and recognise the importance of productivity and capacity of staff is vital, NDB Chief Executive Officer Rajendra Theagarajah said. Boards also need to think bigger – bigger in scale and be able to handle larger-scale transactions. “I also hope boards of these banks will have an increased commitment to better and have more focused staff training.”
Commenting on consolidation and banking, Theagarajah noted that having five banks with assets in excess of Rs. 1 trillion, the banking sector will certainly be less skewed than today with two or three banks which account for about 50%.
Theagarajah hoped that while these banks get bigger, benefits of improved efficiency and scale would be passed in the form of better pricing – a critical ingredient for development. “Getting bigger alone isn’t enough.”
“We note that there are still 10 banks with around 3% market share. The Governor in the Road Map mentioned smaller State banks which account for about 1.7% which were encouraged to merge. My humble request is, why not nudge those 10 banks which have a combined share of 3% to re-examine their role and if they are actually playing the role in the development of the sector?” Theagarajah remarked.
While there will be many technical notes to be focused on in these mergers, what must also be noted is that looking at the amalgamation route, there will be some tax challenges. Perhaps a one-off concession of tax neutrality once you get into the amalgamation is something that the Governor might want to consider, he pointed out.
“In terms of environment, for those who take up the consolidation move, they need to be encouraged to look at this not as an opportunity of asset swapping, (since it is the first time Sri Lanka is going to formally adopt an enabling environment in this industry) but they must take it up for the right purpose and hopefully do it in a way that their rate of growth post merger will be faster and would be able to absorb any temporary surpluses on account of this amalgamation.”
While the Governor touched on robust payment systems and its importance at the discussion on Monday, Theagarajah suggested having a common payment switch where access to an ATM is just a commodity encouraging all banks to embrace a fairer and acceptable tariff structure. On a more regional note, Sri Lanka should also consider linking with a couple of other switches such as the UAE payment switch to expand its access to trade.
Opportunities for insurance industry
While the Road Map will have a limited direct impact on the insurance industry, overall there are many positives and bodes well for not only the insurance industry but also for the country, Insurance Association of Sri Lanka President Prakash Schaffter said.
“The US$ 4,000 per capita income targeted for 2016 – I for one did not think it possible, but looks like we will end up very close to it. There is a 60% growth over the last four years. Unemployment is below 5% over the last four to five years – these are all excellent.” All of this is good news for the insurance industry as high rates of growth means a variety of new projects and ventures, which would mean more opportunity for insurers.
While these opportunities come from people and their higher standards of living, the many infrastructure projects should, in theory, also mean greater opportunity for the insurance market to grow. “But one of the drawbacks the industry has been complaining about is that much of this insurance is restricted to the State sector. It would be good if it opens for the private sector as well.”
Schaffter added: “Our country and its people are undoubtedly better off now than they were a decade ago; a plethora of statists backs this. Consumption patterns have also changed, the portion of people whose basic needs are met is far greater than it was 10 years ago. This means there is a surplus of money available which us insures can tap into. Life insurance policies as a percentage of labour force was at 25% just about five years ago, today it is at 30% and can be increased further.”
Dealing with a double-edged sword
The lower interest regime, which came in for praise by Brito, is a double-edged sword for the insurance sector.
On one hand it reduces the borrowing cost and directly fuels development. On the other hand for insurers who rely on the investment income, reduced interest rates mean a drop in investment income.
“The question I ask myself is, if this low interest regime prevails over a longer period of time, would it marginally push up rates that we charge the end customer? I certainly hope not.”
 Ageing population
Sri Lanka is also faced with the problem of an ageing population. This, combined with the breakdown of extended family system and the lack of a social security system, would mean that when the low interest regime exists, the older people who rely on interest income would find it difficult to survive. However this, despite adversity, is yet another opportunity for insurers. “We need to explore the potential and develop new products and use the muscle that we have to earn better rates of interest. The Government also needs to look at the tax benefits that it offers those who spend on pensions and Life insurance. Currently it is rather low.”
There is a need to look at making it more attractive and giving more tax benefits. He agreed that insurers must also take responsibility. “We have probably not done enough to take advantage of the situation.”
 Effect on the insurance industry
Briefly touching on the consolidation of banks and finance companies, Schaffter noted that with insurers working closely with finance companies and other banks which carry out leasing activities, the consolidation would require the insurers to reshape the relationships with the leasing sector.
He commended the efforts to develop the corporate debt market and secondary market as well as efforts to introduce e-training, introduction of long term debt instruments (especially the 30-year Government bonds and listed debentures).
Most concerns of the industry have been addressed, he expressed. “The insurance sector has proved attractive to foreign investors. From a selfish perspective, if all of these in the Road Map materialise, we will as a sector prove to be a far more attractive bride to the multinational giants than we are today,” Schaffter said.
 Time to act mature
While commenting on the progress made in post-war Sri Lanka, former Central Bank Assistant Governor Dr. Anila Dias Bandaranaike fired up the session, highlighting the importance of welcoming both bouquets and brickbats and calling on the Central Bank to be mature and open for criticism without adopting a defensive stance.
“It is an interesting and exciting time because so much has been achieved in Sri Lanka, but one of the immediate problems I see in the country is the complete lack of space for discussion and debate. You hardly see constructive criticism and responses. There is a lack of polarisation for and against and a lot of destructive criticism and destructive responses.”
Finding your way in the Road Map
Focusing on two aspects of the Road Map – policy issues and presentation – Bandaranaike noted that after five years of concentrated physical infrastructure development and targets that have been projected for higher growth levels, it is now time for a shift in policy from physical infrastructure to human infrastructure. Human capital development, education reforms, labour market reforms and environmental issues need to be given a greater focus in the development process, she said.
On the presentation side of the Road Map, while there are so many good things that have been done, there was too much focus on details and not enough on key areas.
“176 slides later it was like having a map when you want to get from Colombo to Anuradhapura and every single footpath is marked so that the actual road from Colombo to Anuradhapura is hard to find,” Bandaranaike said. “There is so much information here. I would have liked the Road Map to have had maybe appendixes and a little less of the detailed information (even Carlton 7s is mentioned here) and a little more focus on the key issues.”
She added: “In certain areas there is so much excitement and hype about good things happening that some areas are being neglected.”
 Previous targets are not achieved
Having analysed the medium term projections made in the CBSL Annual Reports in 2009 and 2010, she noted that the goals have not been achieved today, from where we were then expected to be.
“Not in any way to undermine where we are in reality, but GDP growth was by now supposed to be at 8% according to the 2009 projection, while in 2010 this was raised to 9.5%. Economic growth and the deflator were to come down to 5% by now, while we are currently at 7.2 and 7%.
The actual current GDP is higher than the target, but only because inflation is higher, she explained. She further added: “Investment seems to be on a steady over 30%, but by now the target was 33%. FDI has grown in nominal terms hugely, but if you look at the FDI GDP ratio in 2000 it was 1%, now it’s at 2%; and the savings investment gap has gone to 6%. Not to undermine where we are, but we have to not be complacent. We have now recognised that the targets we have set for ourselves have not yet been achieved. The country must now grow the external sector and bring in the dollars at a higher rate. The country is still not performing at the level we want to be performing. “We shouldn’t be complacent about the positives; we need to put achievements in context, but must remember that we would like to do better. I would like to see this in the presentations coming out of the Finance Ministry and CBSL – if there is too much hype and you put everything in the most positive light, you lose credibility.”
Learn from the critics
Listening to your critics is the only way to improve, she said. “A lot has been achieved, but no one wants to hear ‘I did this, I did that’. The development in the country is fabulous – it doesn’t have to be repeated over and over again. Let’s see where we are short and see what the criticism is and be constructive. This is what I would like to see in the country.”
She cautioned the Government to not only remember and discuss the hunky-dory policies but to look at the gaps and listen to its critics.
Quoting the Road Map, Bandaranaike noted that the bank should not be defensive in facing its critics. “The statement ‘contrary to the views of many detractors the Central Bank projections have been realised to a great extent’ is a defensive statement. I don’t think this is professional at all. Take the detractors’ criticism onboard. CBSL has done a great job, why should it be defensive? For me, these things are negative; it is confrontational. Take it on board, be mature about it.” Pix by Upul Abayasekara, See more pix on P18

A Q & A session was held following the comments of the panellists after Central Bank Governor Cabraal’s presentation. Cabraal responded to each inquiry made by the members of the audience, while commenting on some of the key observations cited by the panellists. Following are excerpts from the session:

Poverty alleviation and measures taken by the Government
Three key measures were taken which includes providing electricity, building the road network and creating access to finance.
In terms of electricity, previous coverage was 74% while it is now reaching almost 100%. In terms of road network thousands of kilometres of concrete roads have been put in place in rural areas to create mobility so that they can take their produce. Access to finance is an area we have looked at very keenly as well. This job of poverty alleviation is not over; it will exist until every single person is out of the poverty box. If we went on the same rate of growth like we have done in the past we would have taken 40 years to reach this level. Because we fast-tracked growth and ensured there is regional representation of that growth as well as equity in development, we were able to make it faster. We are not yet satisfied as we want to make it zero or close to that.

Increased unemployment rate

Yes, there is an increase in the unemployment rate. We believe it is because of the new entrants in to the field where they have not yet been able to have jobs taking place. The overall amount of investment for this cannot stop for a single year, it must be continued. Hence the importance of pipeline of projects. If you have a gap of one or two years, you will have a serious issue.
Yes, there is a slight increase but we think it will catch up as a result of so many new projects coming in to the pipeline. We will probably see it going back to its level this year.
Provincial development
A lot has been done in this regard. The way in which Sri Lanka structured its overall infrastructure development in the first five years since 2006 – each one of the top range infrastructure development projects had some connection to every lagging district so there is a top-down effect of the trickledown effect taking place.
At the same time there were village level projects taking place as well. During the same time there are 14,400 projects carried out each year of at least Rs. 1-5 million in every village to ensure provincial development.
Inflation targeting
We have done a number of reforms to bring inflation down. We have stopped short of saying the words ‘inflation targeting.’ We are looking at inflation between 4-6% this year. We have said what our tolerance limits would be, where we expect the middle level of inflation to remain. Even though we have not specifically said we are ‘targeting inflation’ because that has other connotations we are in fact doing something very similar to that as we have our own limits at which we will not be going any further from. We will continue to have a focus on inflation on those lines.
Why SLECIC should be scrapped for an import-export bank?
It is not necessary to scrap SLECIC (Sri Lanka Export Credit Insurance Company) to have an import-export bank. As Sri Lanka moves to the next stage of development, there might be reason for us to have a bank which will support the buyer in other countries as well so that they will be in a position to have the funds to buy the products from our private sector. We are looking at that, however there is no time frame yet. Maybe next year in our Road Map we will talk about this more deeply.
Restructuring of People’s Bank and BOC
People’s Bank is functioning well now, and does not need any restructuring. It is one of the better banks in the country. They are being well managed, as is BOC. We believe the important element of management expertise as well as managing them in a sustainable manner has taken place.
There was a time when it was not managed well; they were politically stressed as well. This is not the case any longer. They have the independence to decide on their overall policies and they are implementing them in a way that has helped them compete with other private banks as well.
On receiving criticism
We are quite willing to take criticism also. In our consultative committees we have many private sector people serving, and we appreciate their input. It is not always that you must have a discussion where you must scream at each other. You can have very fine discussions behind closed doors where we talk in very rational language and come to grip with issues in place.
We (in the Monetary Board) don’t always have wonderful meetings where we pat each other on the bank. We have good meetings and they are held with mature discussion points. We have had open discussions. They have the ability ask questions from me and I have answered them. We have an administration of that nature. We put out our plans, and are quite happy to have them discussed, dissected and have that interaction.
Rajan Brito’s point on the lack of skilled labour
This is a valid point, and we need to work on that. Private sector also must take the responsibility because when you are doing a particular industry you have to prepare people for that. Last year we recruited 150 top notch management trainees whom we are training. If you are looking at a new industry with a new perspective, you need to train your own people as well.
Rajan Brito’s point on possible overheating
We are very conscious of that. We will be able to have new elements of the economy which will also be the stars that will attract new types of economic activity. We will keep a close tab to ensure there is no more overheating.
Rajendra Theagarajah’s point on the ten small banks
We want them to grow also. Maybe they have to look at organic growth, or even inorganic growth; maybe some consolidation, mergers. If you look at the way Sri Lanka’s banking sector and NBIF sector has grown, it is only when there was a crisis and some banks were in trouble that the Central Bank has stepped in and asked the bank to be taken over by another bank – this is the only time for mergers. There have been no desire for merges by themselves and we would like to see this taking place.
Rajendra Theagarajah’s point on the common switch
The common switch is an excellent idea. We are hoping we can have this during the year. We have already seen People’s Bank and BOC getting together. As a result of this synergy both banks now have ATM connectivity of 500 ATM’s.
If it works well every bank will have 3,000 ATMS switches. This would be an enormous thrust for the economy and create convenience and comfort for customers.
Connecting to gulf is something we need to work on. It is an idea we will take on board and look at it as a possible way forward.
Schaffter’s point on developing instruments and the ageing population
We will be very happy if the insurance industry also develops some new instruments in order to safeguard the elderly investors as well. Sri Lanka will have a sharp transition from a high interest rate regime to a low interest rate regime, much faster than many other countries have undergone.
This will require some quick responses and I believe the insurance companies are well poised to do this. We have already discussed with key banks to see if they could develop annuities to provide some element of comfort and instruments to those who are depending on interest income.
Responding to Anila Dias Bandaranaike
Your comment on lack of space for discussion is not very accurate. Look at discussions at private parties, controlled forums for discussions. It is happening.
We think the Central Bank must also respond. It is not only for the private sector and few individuals to come and say anything and everything. We have been told that our roadmap is ‘nauseatingly one-sided’ and we are expected to keep quiet. I don’t think that will happen. We will also respond if there is a response to be made.
CBSL also has clever people, the only economists we talk about are not outside the CBSL, there are 600 of them within the bank and they also have their views.
We have given them the space to do that and we will encourage them to do that. People who are making outrageous comments will run in the future, because they will also be responded to. It is not one-way traffic.
We have given a lot of information on the roadmap and there is a lot more. But we needed to pick and make it interesting as well, CHOGM, Carlton 7s were chosen to show how the country is moving. Maybe for some it is anathema but maybe next time we will discuss a few fashion shows.
This is a document which has all components people need to take their decisions.
Some are gung-ho when targets are achieved, others are gung-ho when targets are not achieved.

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