HNB’s Jonathan Alles on the need to empower banks
Jonathan Alles, Managing Director and Chief Executive Officer of HNB, one of the leading private banks in Sri Lanka, weighs in on the unfolding economic crisis and its impact on the banking sector. He offers suggestions on what Sri Lanka can do to enable its banks to become more effective in driving the economic revival as myriad challenges and looming haircuts from debt restructuring cause difficulties for banks.
HNB has one of the larger balance sheets in the financial sector in Sri Lanka. Whatever happens in the economy will impact your balance sheet, so what do you anticipate will happen with the economy looking forward?
The banking sector has a role in stabilizing the economy and reviving growth, as it has often done during past crises. HNB is a bank with the scale to make a significant impact. As such, we remain committed to securing the future of this country. But let us look at the immediate challenges confronting the banking sector.
The country is contending with a debilitating forex issue that is unprecedented in scale. The shortage of foreign exchange is so severe, that it is becoming increasingly challenging for banks to support imports. While the export sector has to be commended for its resilience, it is not generating sufficient forex inflows into the system.
Several measures have been adopted to contain the outflow, including delaying payments for non-critical imports and curtailing foreign transactions on credit cards. Each month the country raises approximately $1 billion from exports, whereas imports amount to nearly $2 billion despite the various import controls. In 2021, the annual import bill was about $20 billion, while exports were approximately $12 billion.
The halving in worker remittances – another vital source of foreign exchange – and earnings from tourism going into freefall have only compounded the forex shortage leading to shortages for essentials like food, medicine, gas and fuel. Some exporters and migrant workers may be holding on to their earnings overseas as they lack confidence, or resort to grey market channels to convert their forex earnings at a higher exchange rate for a few more rupees. This is the reality. We have to work with what we have, and without inflows into the system, banks have very little to work with to stabilize or fuel the engines of the economy.
The spate of downgrades of the sovereign rating and the announcement of the suspension of external debt has had a knock-on effect, cancelling our foreign exchange and swap limits in total. As a result, we are delaying disbursing forex to import clients, many of whom have been with us for 3-4 decades. These deep exclusive relationships stand on decades of reliability and trust, but that can only take us so far. This is the most serious structural challenge that has to be resolved.
And it is the result of the country having defended the currency for too long by sacrificing its forex reserves. Alternatively, the grip should have been gradually eased, avoiding the steep overnight depreciation from Rs 200 against the US dollar to Rs 390, compounding the stress on the economy and the people of Sri Lanka as price adjustments overshot.
However, we are hopeful the exchange rate will correct itself, easing significantly to more appropriate levels once an IMF programme is in place. Had we gradually let go of the exchange rate three months ago, as most reputable experts had called for, we believe the US dollar would be range-bound at Rs 250-260 today instead of Rs 370! What the country needs right now is for an IMF programme to come through fast, and we are made to understand that discussions with the IMF are progressing well.
The IMF Board will need reassurances from the government concerning debt sustainability and that creditors are satisfied with the repayment plans. We are hopeful the IMF Board will approve a programme for Sri Lanka by this October or November at the earliest, mapping the disbursement of agreed-upon funds over the next few years. Parallel to these efforts, the Government will need to have a focused budget for the short term to deal with some of the immediate issues, and a clear roadmap and plan for economic revival and sustainable growth. In the interim, the country will have to secure bridging finance from supporting nations and multilateral agencies to deal with the shortages of essentials like food, gas, fuel and pharmaceuticals.
How is the banking sector geared to deal with these challenges and enable the rest of the economy?
It is going to be a difficult task, especially given that dwindling foreign exchange reserves and external borrowing lines mean the sector is dependent on deposits. At present, inflows into foreign currency deposits are also weak, which in turn constricts foreign currency lending. We understand that foreign currency borrowers are struggling, but banks may likely have to encourage them to start repaying. In the absence of deposits, the loan repayments can generate some forex liquidity into the banking system to support export finance at least, if not more.
On the Sri Lanka Development Bonds, domestic investors are getting rupees instead of the US dollars they invested and now have to build their forex reserves from scratch. Given how dire the situation is, no one is complaining because we all understand the need to work together to reset the economy, starting with the long-overdue exchange rate and interest rate adjustments. We now see efforts to correct interest rates from the disparity and arbitrage between interbank rates and the Treasury bill bond rates. Policy rates increased by about 700 basis points, but that had a knock-on effect. Today, Treasury securities are around 25-28%, which is phenomenally high. The authorities are also keen not to add further inflationary pressure by printing any more money.
Today the country is in hyperinflation territory, with inflation rising to 54.6% in June, and this is from an economy that once prided itself on maintaining inflation at 4-6%. Clearly, something has gone wrong with our fundamental, fiscal and economic management.
Interest rates have followed inflation to some extent. We cannot continue to sustain high expenditures by printing money because that money would end up in the economy. When there are fewer goods and services available due to supply constraints, price inflation takes over. In that aspect, we are happy to see some fiscal adjustments taking shape in the form of tax increases.
As borrowers, both individuals and businesses, contend with elevated interest rates and low debt servicing capability due to the impacts on earnings from the economic crisis, banks are likely to see loan repayments shrink, even as COVID-era moratoriums come to an end. Banks are looking at deteriorating asset quality and higher impairment costs. The more we impair, the more the P&L gets impacted, leading to challenges around capital and liquidity.
Thankfully, most banks are well-capitalized and have the buffers to surmount the challenges. Few anticipated the scale and impact of the current external debt crisis. Now, with banks exposed to Sri Lankan ISBs and SLDBs at varying degrees, any proposed haircut would impact their capital very significantly.
If you had some recommendations for policymakers, what would those be?
Banks would like to get involved and drive the economic revival. After all, that is what we are there to do. However, to be effective, policymakers must firmly commit to structural reforms, including fiscal and monetary policy, and formulate plans with adequate accountability and review processes in place to take the economy forward. From what we have seen over the last few years, we have resorted to short-term fixes and postponing the inevitable in some cases. The government and people of this country cannot expect the banking sector to solve fundamental problems with the economy, nor should they expect banks to resuscitate state institutions and every failing industry. We pride ourselves on building a resilient banking sector for the country with solid KPIs, capital buffers and profitability. But beneath all that are some ill-advised ventures such as investments in loss-making SOEs or even the extensive moratorium programme post-COVID, which the banking sector is exposed to that could lead to significant stresses.
We need to brace ourselves for that. There must be some focus to protect and strengthen the banking industry. Given its essential role in facilitating exports, SMEs and other critical sectors, if there is an industry that needs a national fund to support it right now, it would be banking. We need some amount of liquidity in dollars to restore confidence in our ability to execute international transactions and honour external payments. The entire economy stands to benefit.
Repaying any dollar liquidity support over a short to medium-term period is possible, but the challenge remains about sourcing such funds in the first place.
That is where investors come in. They can add their support to the banking sector, and in the process, buy into the underlying spirit of the remarkable changes that we have seen in Sri Lanka over these past months, namely: the belief that we can, and will turn this economy around. It will take time, but we will come through in the end.
That is where investors come in. They can add their support to the banking sector, and in the process, buy into the underlying spirit of the remarkable changes that we have seen in Sri Lanka over these past months, namely: the belief that we can, and will turn this economy around. It will take time, but we will come through in the end.
While painful, it created greater resilience because there were tight controls, as well as monitoring, to ensure that banks built in greater stability. That checked the insanity, and now banks are more accountable to investors and public depositors because they cannot do anything and everything. Banks are merely the custodians of shareholder and depositor funds. As such, we are accountable for every single rupee. That is the level of care in which we run banking operations and manage this business.
With export revenue and inward remittances deteriorating, we also have to surrender 25% of forex inflows to the Central Bank, making it harder for us to service our customers. With potential haircuts from restructuring ISBs and SLDBs, the banking sector is constricting further. Moving forward, the banking sector needs greater flexibility to support our customers, and at this stage, we only want dollars for essentials like food and fuel. While it may complicate negotiations with some foreign creditors, I believe that local government debt i.e. Treasury Bills and Sri Lanka Development Bonds should remain out of any debt restructuring agreement, since the impact on domestic banks, and by extension, the grassroots of the economy and the average Sri Lankan will be severe. In addition, authorities need to pay more attention and have stricter controls in tracking export revenues and import outflows to avoid any leakages, and in addition, introduce new measures to encourage remittances into the country, while tracking and identifying some of the big illegal market activists and take appropriate action. We only have difficult choices ahead, but with the right balance of policies, there is still a narrow path for progress to be made.
We have a complex problem comprising myriad complex issues with no easy solutions, so what would you like to fix if you could?
In a word: leadership. This is the moment to bring in real experts in their respective fields to lead the development of policies that will secure this country’s future. We have always had such people, but they have never been allowed to do their jobs. We need economists and experts in banking and finance to set macro-economic policy, and align it with the requirements, and objectives of the real economy.
There are many Sri Lankans with impressive achievements and experiences with global and local financial organizations, including the IMF and World Bank, while less qualified people were allowed to run the economy into ruin here. We need to attract Sri Lankan professionals on the ascendency or pinnacle of their careers to take up the mantle of leadership, and help reset the course and steer the economy out of this crisis. We need sweeping education reforms to foster entrepreneurship, build and nurture future-ready talent, and improve access to finance for sustainable growth and elevated livelihoods from the grassroots upwards.
We need to drive sustainable sources of generating the most important foreign exchange – exports. This means strategic import substitution and modernization of agriculture. It means supporting technopreneurs, and Sri Lankan professionals to export their services. It requires an urgent restarting of tourism, remittances inflows, and the promotion of Sri Lanka as an education hub to retain foreign currency in Sri Lanka while generating additional earnings through foreign students.
In addition to urgently expanding our export capacity, we need to simultaneously curtail all wasteful expenditure. Sri Lanka cannot afford a single white elephant. All of the existing investments in non-productive assets need to be re-evaluated and repurposed for a productive purpose or be liquidated. Underperforming sectors – including the public and private sectors and SOEs, need to either be reformed or shut down so that their labour can be redirected into the parts of the economy capable of generating foreign exchange or providing essential products or services. Sri Lanka has no choice left but to transform into a productivity-obsessed nation.
Most importantly, Sri Lanka needs leaders with integrity who can end the culture of corruption, cronyism, and welfare entitlement once and for all. We need disciplined and principled leaders who lead by example at all times. As individuals, we must also set the example ourselves, wherever we are and whatever we do. Let’s wake up and do the right thing for our country and our people. Everybody is watching us. Let’s not embarrass ourselves further. We are made of better stock and capable of so much better. Whatever it takes, we must unite to help our country and our people out of this crisis and towards prosperity.
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Sri Lanka Acting President declares state of emergency
ECONOMYNEXT – Sri Lanka Acting President Ranil Wickremesinghe has declared a state of emergency with effect from Monday July 18.
According to an extraordinary gazette issued Monday morning, the emergency was declared in the interests of public security, the protection of public order and the maintenance of supplies and services essential to the life of the community.
Wickremesinghe was sworn in as Acting President on Friday July 15 before Chief Justice Jayantha Jayasuriya. He was appointed following the resignation of former President Gotabaya Rajapaksa who fled the country following a massive protest that demanded his ouster.
Sri Lanka is going through its worst economic crisis since Independence, with a crippling dollar shortage resulting in long queues for fuel, cooking gas and other essentials.
The country has also seen much unrest in recent weeks, with protests intensifying and leading to confrontations between protestors and security forces.
While activists and opposition lawmakers accuse the government of overreach and oppression of peaceful protest, the government claims that “fascist” elements within the protest movement are deliberately engaging in violence seeking to destabilise the country. (Colombo/Jul18/2022)
Sri Lanka bank negative NOPs reducing, flexibility given: CB
ECONOMYNEXT – Negative net open positions in Sri Lanka’s banks were reducing in early July, while flexibility has been given to lenders given current crisis, Central bank officials have said as the country is gripped by the worst monetary crisis in seven decades.
“Given the situation we have given some flexibility for banks on prudential basis for them to manage without imposing strict NOP positions,” Central Bank Governor Nandalal Weerasinghe told reporters after the July monetary policy meeting.
“They can go negative or positive depending on the liquidity availability. They are given the flexibility in this kind of situation.
“They are using that space and going up and down. Some banks are going negative and again acquiring positive if they get liquidity.”
Negative NOP are least in foreign banks and but a found in higher volumes in state and private banks, market sources say.
Sri Lanka’s banks are facing the most severe currency crisis (soft-peg crisis) in the last seven decades with lenders forced to pay up on letters of credit and also repay foreign lenders or depositors with loans to the state or state enterprises sometime being repaid in rupees.
However there is some improvement in July.
“Overall there is a build up of NOP position by the banks these days due to conversion that are taking place,” Director of Economic Research, P K G Harischandra said.
In past forex shortages coming from the soft-peg bank NOPs have mostly been positive, and the central bank have issued rules to reduce them, sometime delaying rate hikes to curtail credit and outflows.
In the current crises some banks had problem honoring swaps and also letters of credit particularly to oil suppliers.
Imports are coming down overall, with higher interest rates curtailing credit.
The issue here is there are legacy payments,” Governor Weerasinghe explained. “Those are coming due. There are arrears coming due. The banking system has some arrears to be paid. Those are adding to the day to day outflows.
“That will have to be taken care of, or we have to seek extension of those credits going forward, so that we can manage the situation.”
Sri Lanka’s imports fell to around 1.4 billion dollars in May from around 2 billion dollars in late 2021 when large sterilized interventions were being made. (Colombo/July18/2022)
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Sri Lanka President Gotabaya Rajapaksa has resigned after months of protest
ECONOMYNEXT – Sri Lanka Parliament Speaker Mahinda Yapa Abeywardena has received and accepted President Gotabaya Rajapaksa’s resignation letter effective July 14 and Prime Minister Ranil Wickremesinghe will serve as Acting President till parliament elects a new president, the Speaker said.
Abeyewardena made the announcement at a press conference held at his official residence Friday July 15 morning, ending days of uncertainty over the president’s official resignation which had been announced and delayed several times over.
Former President Rajapaksa is currently in Singapore on what is officially termed a private visit, having fled Sri Lanka to the Maldives after thousands of protestors stormed his official residence on July 09 demanding his resignation.
Youth-led protestors have been demanding his resignation since late March this year over his role in what has become Sri Lanka’s worst economic crisis since Independence.
The country is now going through its worst fuel crisis on record, with miles-long queues for petrol and diesel seen snaking around towns all over the country, along with queues for other essentials like cooking gas which are on short supply due to a severe shortage of dollars.
Experts and opposition lawmakers have blamed Rajapaksa for ill-advised policy decisions such as record levels of money printing, massive tax cuts and an overnight ban on inorganic fertilizer, all of which they say have had contributed to the crisis.
Rajapaka and the ruling Sri Lanka Podujana Peramuna (SLPP), however, have claimed the crisis is mostly due to the COVID-19 pandemic which resulted in the deterioration of the dollar-earning tourism sector and a drop in foreign remittances. (Colombo/Jul15/2022)
Sri Lanka’s fled president sends resignation letter via email, legality checked...
ECONOMYNEXT – Sri Lanka’s embattled president Gotabaya Rajapaksa, who has fled the country fearing for his life, has sent his resignation letter via email to Parliament Speaker Mahinda Yapa Abeywardena, sources said on Thursday.
Rajapaksa, who fled the country and flew to Male in an Air Force flight on Wednesday early morning was expected to send the letter later on the same day. However, it was delayed as Rajapaksa, was not able to reach his “final destination”, his close allies have told Economy Next.
The letter was sent via email to the Speaker and an official who is aware of the matter said they are checking the legality of the latter and if such letter could be sent via email.
“The Speaker has received the resignation latter of President Gotabaya Rajapaksa via the office of Sri Lankan embassy in Singapore,” Speaker’s Media Secretary Indunil Abeywardena said in a tatement.
“After clarifying the accuracy and finalising the legality of the letter, the speaker will officially announce with regard t this by tomoorow.”
However, a government source said the original letter would be handed over to the Speaker through a key official of Rajapaksa’s staff, if required. It was not immediately clear if Rajapaksa had signed the letter in Singapore or before he fled the country.
Rajapaksa sent the letter after he reached Singapore late on Thursday from Maldives, flying in a Saudi Arabian Airline. His stay in Maldives was facilitated by the Ibrahim Mohamed Solih’s administration in Maldives with its Parliament Speaker Mohamed Nasheed personally visiting to the Male airport to receive him amid many Sri Lankans living in Male protested against the move.
“President GR has resigned. I hope Sri Lanka can now move forward,” Nasheed tweeted.
“I believe the President would not have resigned if he were still in Sri Lanka, and fearful of losing his life. I commend the thoughtful actions of the Govt of Maldives. My best wishes to the people of Sri Lanka. ”
President GR has resigned. I hope Sri Lanka can now move forward. I believe the President would not have resigned if he were still in Sri Lanka, and fearful of losing his life. I commend the thoughtful actions of the Govt of Maldives. My best wishes to the people of Sri Lanka.
— Mohamed Nasheed (@MohamedNasheed) July 14, 2022
Rajapaksa was forced to flee after tens of thousands of protesters stormed into his official residence on Saturday (09). The protesters had demanded his resignation for his policy failures after his government printed trillions of rupees which eventually caused Balance of payment crisis, dollars shortage and steep decline in foreign currency reserves.
The lack of dollars later led to shortage of essentials like food, medicine, cooking gas, and essential foods including milk powder. His policy on overnight chemical fertilizer policy ban led to a food shortage and the island nation is facing a looming food shortage.
It was not immediately clear if Rajapaksa would request for political asylum in any foreign country. Singapore government confirmed his entry into city nation.
“In response to media queries, it is confirmed that Mr Rajapaksa has been allowed entry into Singapore on a private visit,” the Singapore’s Ministry of Foreign Affairs said in a statement.
“He has not asked for asylum and neither has he been granted any asylum. Singapore generally does not grant requests for asylum.”
Sources close to the president have said he was aiming for a country in the Middle East. (Colombo/July 14/2022)
Sri Lanka President flees to Maldives
ECONOMYNEXT – Sri Lanka President Gotabaya Rajapaksa had fled to the Maldives in a military aircraft, reports said as his resignation is expected later in the day amid the worst currency crisis in the history of the island’s intermediate regime central bank.
Sri Lanka Air Force said an aircraft was given to President Rajapaksa, his wife and two body guards to leave the country following a request of the prevailing government in the early hours of July 13 to leave for the Maldives.
It was done “with the full approval of the ministry of defence, under the immigration, customs and all other laws at the Katunayake International Airport,” the statement said.
Social media posts from the Maldives showed a motorcade of vehicles being escorted with sirens blaring.
Sri Lanka President Rajapaksa is expected to give his resignation today, according to an earlier statement by the Speaker of Sri Lanka’s parliament.
If President resigns and Prime Minister Wickremesinghe does not resign, he will become President for a time.
Sri Lanka protestors and other opposition groups have warned that the move will be opposed.
However the Rajapaksa group in parliament showed that it had a majority by changing the law of the Ceylon Electricity Board law to end competitive bidding for procuring power, political analysts say.
President Rajapaksa was forced to resign following the worst currency crises triggered by the island’s intermediate regime central bank.
The central bank has busted the currency from 4.70 to 380 to the US dollar since the Latin America style agency was created by a US money doctor in 1950. (Colombo/July13/2022)
