By Jonathan Alles, Managing Director / CEO - HNB
In the wake of exponentially more severe disruptions - from extreme weather events, to the tragedy of the Easter attacks, to the COVID pandemic, and of the upheavals caused by last year’s economic crisis - Sri Lanka is a nation in desperate need of economic revival.
For the first time in our history, the majority of Sri Lankans are united in their shared hardship arising from the total depletion of the nation’s foreign currency reserves. Even the wealthiest in our society were forced to wait in queues - sometimes for days – simply to secure basic essentials of food, fuel, gas, and medicine. Tragically, some even lost their lives while they waited.
All the while, we are losing more of our best and brightest – from young students brimming with potential to experienced professionals with irreplaceable expertise – who leave our shores in search of better economic opportunities and a fair and functioning system of government. In many ways, this has been the story of every prior generation of Sri Lankans. However, the economic failures of the recent past represent a watershed moment unlike any other.
At the root of this historic crisis is our nation’s unsustainable public debt. Without carefully planned interventions, there is little that can be done to ease the catastrophic burden that is now being placed squarely on the shoulders of Sri Lanka’s citizens, communities and its enterprises – large and small.
Today, we have allowed public sector debt to escalate to US$ 83 Billion – amounting to approximately 128% of Sri Lanka’s GDP. As a nation, we owe US$ 41.5 Billion to foreign creditors and US$ 42.1 Billion to domestic creditors.
Even in 2019, when there was seemingly no crisis on the horizon, Sri Lanka still had a poverty headcount of 14%. But today, 31% of Sri Lankans face abject poverty, with additional 4 million citizens having fallen below the poverty line.
As a nation, we applied little to no thought as to how we would pay back our debts, even in the face of increasingly desperate warnings from all corners of society. This in turn created a top-down culture of excess and indiscipline as successive Governments continued to borrow and print money without any thought as to how we could repay our debts and mitigate the debasement of our nation’s currency.
Worse still, the ways in which we did chose to spend failed to lift more Sri Lankans out of poverty through investments in education and job creation. Instead, we as a nation gave room for conspicuous consumption, frivolous spending, and near unbridled corruption.
Now cut off from the ability to borrow any further from international capital markets, Sri Lanka has no options for incremental reform left. The only way that our nation can pull itself out of crisis is through sweeping changes. The time for half-measures is long past. We need sweeping changes to tackle this crisis head-on. Recognizing the critical role of banks in supporting businesses and individuals, we must strengthen and stabilize them.
Now on its 17th Extended Fund Facility (EFF) under the International Monetary Fund (IMF), the Sri Lankan Government has committed to a series of long overdue reforms aimed at reigning in runaway public debt down to 95% of GDP by 2035 and leading the nation back to a stable macroeconomic position.
Given the damage done to Sri Lanka’s reputation as a responsible borrower, a pre-requisite imposed by the IMF for renegotiating our foreign debt, was for a parallel restructuring of domestic debt. This culminated in the finalization of a Domestic Debt Optimization (DDO) plan last month. To the consternation of some, the DDO included Treasury Bonds held by provident funds, but excluded those held by the domestic banking sector.
Despite the concerns raised, we believe that safeguarding the banking sector, and by extension the depositors, and all other stakeholders of Sri Lanka’s banking and financial systems was the correct measure to support economic revival.
It is important to consider that banks have been facing significant challenges, including high tax rates (30% corporate tax, 15% VAT, and 2.5% SSL), in addition to massive impairments as a result of moratoriums. Together with other emergency relief extended through the worst of the past 4 years of crisis, there were times when up to 40% of the entire banking industry’s balance sheets were under moratorium.
While this figure has reduced to just 10%, there are many who are still struggling to get back on their feet for whom the industry and HNB in particular continues to support through restructuring and rescheduling. This is something that we are eager to do for customers who are genuinely committed to reviving their enterprises. But we also exercise utmost caution given the extreme constraints in our operating environment.
The added burden of haircuts on public debt held by the banks would only have served to erode the ability of the entire banking sector to play an active role in funding the supply-side investments necessary to overcome the challenges that lie ahead.
The breathing room created for the banking sector as a whole will be critical to securing a durable, broad-based economic revival. However, this in turn is contingent on the Government taking all possible measures to create a fair and enabling environment for enterprises – and especially for SMEs to recover, and build up export capacity rapidly.
These factors have been well understood by the key policy makers, as alluded to by Central Bank of Sri Lanka Governor, Nandalal Weerasinghe who acknowledged the need for further lowering of interest rates from the current levels to support business growth, with inflation expected to remain within single digits.
While Sri Lanka’s economic crisis is taking place in the backdrop of unprecedented global volatility, our nation’s rebound so far has been ahead of initial projections and there may be an opportunity to revisit some of the IMF’s projections on GDP, inflation, and interest rates, all of which will have a bearing on the domestic component of Sri Lanka’s public debt.
Additionally, HNB and many other banks had already made provisions on their holdings of ISBs, all of which could potentially be passed on by banks to support business revival. Negotiations are also underway to secure support from the Paris Club, and other bilateral donors. All of these measures will help to manage Sri Lanka’s debt. But the other side of the coin is revenue generation.
Relative to industry averages, HNB has been diligent in maintaining a healthy asset quality, as reflected by stage 3 ratio and stage 3 provision cover. Together with most other banks, HNB had also made provisions for ISBs, and we have also been engaging with international development agencies, bilateral donors, and international funds to help raise and channel additional support to enterprises, particularly those in the SME sector.
The news of the Government’s plans to divest from State Owned Enterprises is certainly a step in the right direction, as it will create space for private enterprise to enter, compete, and have a significantly greater impact. However, for a true turnaround, we must find ways to not just reduce the size of Government, but also to enhance its functioning.
The kind of digital transformation that has taken place at HNB is an ideal blueprint for the direction in which all Public Services, and private enterprises must now move. Administration, procurement, tenders, and all revenue streams of the Public sector must be digitalized in order to ensure transparency, accountability and efficiency. If the public sector can demonstrate that such reforms are happening in good faith, and without compromising good governance, it will encourage significantly more Sri Lankans into the tax base.
This in turn will create a more sturdy foundation for attracting Foreign Direct Investment, which is another essential pillar to Sri Lanka’s economic revival. In particular, we need appeal to global leaders in IT, KPO and BPO. Similarly, we need to engage with global leaders in hospitality, entertainment, tourism, medical tourism, and education to set up in Sri Lanka and start attracting invaluable foreign exchange into the country. Such measures will help conserve significant amounts of foreign exchange for Sri Lanka, given that almost all who can afford to access such services will continue do so instead of relying on local health and education.
The journey towards economic revival requires us to be humble in acknowledging past mistakes. For a stable and prosperous future, we must prioritize good governance, responsible leadership, and transparency.
To achieve economic revival, we must also break free from the constraints of ‘business-as-usual’ in Sri Lanka. Instead, we need to explore entirely new avenues for creating growth opportunities, and engaging with the world.
This approach also invites a fresh perspective on what it truly means to be Sri Lankan. The potential to become a global leader in circular economies, sustainable innovation, and advanced technology is within our reach, and we can draw on the talents of bright individuals – not just from across Sri Lanka – but from all around the world.
By creating a platform for these talents to contribute to a new economy, we can solve not only our country's challenges but also those of the world. Reversing the brain drain impact necessitates the attraction of skilled expats and the return of the Sri Lankan diaspora, in addition to nurturing and building up local talent. This collective effort will pave the way for a resilient and vibrant economy as the banking sector, government, and businesses work hand in hand. It's time to seize this opportunity, uniting as a nation to rebuild and steer Sri Lanka towards a long-overdue era of sustainable growth and prosperity.
