The Sunday Leader

SL In Rapid Economic, Social Progress – CB Governor

By Faraz Shauketaly

Ajith Nivard Cabraal, Governor of the Central Bank

As Sri Lanka traverses the path of economic development with significant amounts being spent by the government and the private sector, many question the level of public expenditure. To answer those concerns Faraz Shauketaly spoke to the Governor of Sri Lanka’s Central Bank, Ajith Nivard Cabraal for a frank overview of the economy.

Excerpts of the conversation:

Q: How important are Finance companies in the development of the financial sector?
A: Licensed Finance Companies (LFC) sector has emerged as an important segment of the Sri Lankan financial system, contributing 7 – 8 per cent of the assets of the financial system. They provide financial services to a niche market who do not have easy access to financial facilities from the formal banking system. LFCs have established a branch network throughout the country to provide services.

The LFC sector mobilises funds mainly by way of deposits whilst providing a variety of financial facilities including facilities to micro enterprises. The finance leasing and hire purchase are the major categories of financing accounting for more than 75 per cent of the total accommodations. In addition, they provide financial facilities for real estate, small and medium enterprises and microfinance sector. Therefore, LFC sector helps to improve the livelihood of lower income segment in the economy and thereby contribute to the economic growth of the country.

Q: Simplistically speaking, why can’t we have only banks – are they not a whole lot safer?
A: As I said, LFCs and other Non-Bank Financial Institutions provide financial services to segments that don’t have easy access to mainstream banking system. Hence, these institutions help to improve financial inclusion within the economy thereby supporting economic growth.

Q: What plans do you have to encourage Finance companies to be more dynamic or aggressive or indeed progressive in the development of the financial sector?
A: Steps are continuously being taken to strengthen the capital position, risk management and governance practices of finance companies. We have also highlighted the need to consolidate the LFC sector by way of merging and amalgamating small LFCs which would improve the overall financial system stability. LFCs with good credit ratings have been permitted to mobilise foreign currency deposits to broaden their funding sources and expand the business operations. These efforts are expected to broad base the business model of the LFC sector to be in line with the economic growth and facilitate to absorb any future risk.

Q: To your credit you have promised support for Finance companies with long term deposits for example. When will this likely happen?
A: The Central Bank has already permitted LFCs with good financial standing to access long term funding by way of issuance of debt instruments. At the same time, some funds from the Deposit Insurance will also be made available as a liquidity support for these entities. This will result in avoiding short term asset and liability mismatches. Further, we expect the present macro-economic situation such as single digit inflation regime will encourage investors to move towards raising long term deposits.

Q: The stock market performance is now dull to low in terms of activity and prices. As it appears to be a buyers market, why do we not see government funds like EPF and ETF being more active? Is it not a good indicator when government funds are seen to be supporting the secondary market?
A: EPF takes a long term view in its investments with a view to providing a maximum returns to members, while ensuring the liquidity needs. Hence, an appropriate balance in the investment portfolio is undertaken by allocating funds between different maturity periods, different sectors, and different types of instruments and asset classes, based on risk – return profile.

Hence, investment in different sectors of the equity market is undertaken by the EPF consciously to ensure long term growth and income to the fund. Therefore, EPF strategically intervenes in the market whenever the market conditions are opportune to buy or sell.

Q: The newspapers are full of advertisements for a variety of financially led investments including in timber and fruits like rambutan even. There are even schools that will pay you a return on ‘security deposits’. The way the rules work at the moment, this sector is not pro-actively regulated. Is not this a disaster waiting to happen?
A: The previous regulatory framework, Finance Companies Act (FCA), No. 78 of 1988 did not have a definition for ‘deposits’. Instead, it contained a definition for ‘finance business’ and in order to prove carrying on of finance business, three aspects of the business had to be ascertained, i.e. acceptance of money as deposits, payment of interest thereon and lending/investment of monies so accepted.

Therefore, under the FCA a person who accepts deposits from public but does not invest or lend money will not be guilty of carrying on finance business without authority. Even though acceptance of deposits and payment of interest thereon may be proven by documentary evidence, it was extremely difficult to find substantial evidence with regard to lending/investment of such deposits. This resulted in various shadow banking activities being carried out under various guises.

In the FBA, the term “deposit” is defined as a “sum of money paid on terms under which it will be repaid, with or without interest or a premium and either on demand or at a time or in circumstances agreed to by or on behalf of the person making the payment and the person receiving it”. There are however, instances that have been exempted from this definition of a deposit, such as money paid to an insurer under the regulation of the Insurance Industry Act, bonds or debentures fully secured by assets of the company and listed debt instruments.
Therefore, an investment on plantation, timber and fruits doesn’t come under the purview of FBA.

Q: Why can’t the Central Bank Monitoring Unit play a far more pro-active and investigative role to ensure that advertisements that carry any form of undertaking in terms of financial returns be legislated to an authorisation to proceed? For example companies inviting participation for sale of land that will have a fruit plantation also projects a return in financial terms. Invariably the scenario is always a case of over promising and under delivering. Some of these projects are not even insured against something like Fire risk? What can the Central Bank do in these instances?
A: The Central Bank has issued regulations pertaining to advertisements published by LFCs when mobilising deposits. However, as I mentioned investments on plantation, timber and fruits doesn’t come under the scope of FBA rather these are considered as long term investments.

Q: On the one hand we have the government espousing the cause of wider ownership, on the other we have spectacular failures in this sector which ultimately cause political and financial fallout. How can the Central Bank play a pivotal role in this instance, especially in the harnessing of the people’s financial well being?
A: During the last few years the Central Bank has taken a series of measures to strengthen the regulatory mechanism to ensure soundness of the LFC sector and safeguard the funds of the depositors. To name several regulatory measures; enactment of the FBA, increasing minimum core capital, introduction of corporate governance and assessment of fitness and propriety of executives and listing in the Colombo Stock Exchange have strengthened the regulatory scope. Further, the Central Bank has increased the number of statutory examinations conducted during a year to ensure regular and stringent supervision.

The enactment of the FBA, mobilising public deposits without authority has been made an offense punishable on conviction after a trial before the High Court. In addition, abetting to mobilise public deposits without authority also has been made an offence. Hence, any person who places a deposit with an entity/person who has no authority to accept deposits will be guilty of an offense.
Further, the Central Bank has introduced the Sri Lanka Deposit insurance Scheme to ensure greater stability for the Sri Lankan financial system.

The Central Bank has taken stringent measures and implemented the restructuring processes with regard to distressed LFCs. All these restructuring processes have ensured the going concern of these companies to safeguard the public funds.

Q: How effective is Central Bank monitoring, for instance, in the field of exports of gemstones? The export does not attract any form of income tax but what checks and balances are in place to monitor that exports ultimately result in foreign exchange being remitted to Sri Lanka as opposed to say, off-shore companies and trusts even?
A: The CBSL monitor both imports and exports regularly from the information collected via Sri Lanka Customs (SLC), EDB, National Gem & Jewellery Authority, etc., for compilation of trade account of the balance of payments (BOP).

The external trade data are in value, volume and any other required form for the compilation of the BOP of the country and to ascertain developments in the external sector. The gem, diamonds and jewellery is one of the categories of data among many that the CBSL monitors.

The proceeds of exports are usually brought into the country as most of the entrepreneurs require their proceeds for work- in-capital requirements, intermediate import requirements and for their business expansion purposes.

The timing of proceeds, settlement arrangement with counterparties, intermediate import requirements are business decisions. All trades conducted by both the private and public sectors are accounted for in the BOP to determine how much money is going in and out of the country. Thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming and operationalise policies accordingly.

Q: Reports attributed to Sri Lanka Tourism state that the stated target of 2.5 Million arrivals by 2016 may not be possible whilst the official target of the government is it will. Conflicting reports although the paymaster is one – the government. Why is there such confusion? Which runs the danger of being interpreted as negativity?
A: Ministry of Economic Development officially launched the Tourism Development Strategy for the five years period of 2011-2016. According to the Tourism Development Strategy, the main target of the tourism sector is to achieve a target number of 2.5 million tourists by 2016. In driving the economy to achieve the 2.5 million tourist target, the country has embarked upon an ambitious programme with number of strategic investment initiatives and promotions to attract fast and emerging market tourists to the country.

Main strategies to reach this goal include development of domestic infrastructure facilities, strategic investments by global hotel chains, promotional campaigns, new tourist attractions and identified zones in the Northern and Eastern provinces for tourism development activities.

Industry-wide investments were made to enhance the capacity to accommodate the growing number of tourists in the country and new hotel rooms were continuously added to the industry. Tourism Development Zones in Kalpitiya, Kuchchaveli and Yala are being promoted for investment with a view to developing tourism on different themes.

Several new and refurbished star class hotels commenced operations in 2012 while new hotels are under construction in different parts of the country. Shangri-La Asia Limited, one of Asia Pacific’s leading luxury hotel chains, has already commenced construction while number of international hotel chains has already started their flagship projects in the country.

Investment pipeline in the sector also geared to meet the fast expanding tourism industry beyond the diversity it offered with additions including entertainment and water front ventures earmarking certain fast growing markets. Number of investment initiatives vouch for the prospects in the industry and would not come unless they see the potential and aggressive promotion and support extended to the industry by policy authorities.

A three-day mega promotional campaign named ‘Get Sri Lanken’ed’, was launched in May 2013 followed by a high profile media conference, which was the first event lined up under the ‘Get SriLankan’ed’ promotional campaign of Sri Lanka Tourism, with the aim of positioning Sri Lanka as the most preferred travel destination in emerging markets of the world. Promotional exhibitions have been taking place in main markets in Europe and in Japan and emerging high potential markets such as China.

The current economic downturn among Sri Lanka’s traditional tourism source markets, especially in the Euro zone, poses number of challenges not only for Sri Lanka but also for the entire Asian tourism industry. In 2012, Thailand, Malaysia and Vietnam attracted over 22 million, 25million and 6 million tourists, respectively. Given that scenario and concerted efforts by the tourism industry in Sri Lanka provide us an ideal platform to work towards attaining the tourism targets over the medium term.

Q: We have provided bona-fide and inalienable information that certain companies have violated Exchange Control rules going back over a period of several years. Neither the Public nor the Press are privy as to what exactly the Central Bank officials are doing about matters that are accompanied by incontrovertible evidence? Indeed it appears your exchange control unit is reactive rather than proactive?
A: Investigations for exchange control violations are carried out under the provisions of the Exchange Control Act. At the end of the investigation, if a person is found to have committed an offence, penalties are imposed or cases are filed at the Magistrates’ Court or the High Court. While individual information cannot be disclosed due to secrecy provisions in the law, CBSL publishes the number of investigations conducted and the penalties collected in the Annual Report of the CBSL (Part II, Section 9). The information is, therefore, accessible to the public.

Year No. of Penalties
investigations imposed and
2012 99 Rs. 14,171,853.03
2011 71 Rs. 25,031,236.69
114 Rs. 8,942,555.37

Q: Governor Cabraal, why is the rupee apparently sliding towards levels never seen before?
A: We observe dramatic fluctuations in many emerging market currencies in the recent weeks, following the signs that the U.S. Federal Reserve is expected to begin to tapering its stimulus package. For instance, the Indian rupee, the Brazilian real, the South African rand, the Turkish lira, the Indonesia’s rupiah and the Thai baht came under significant pressure.
In comparison to most of these currencies, the Sri Lankan rupee has been relatively stable. Since these developments are a result of one-time repricing of risk mainly due to the possibility of increasing bond yields in the US, the recent increase in financial market volatility is expected to dissipate gradually.

Q: What is the Central Bank’s appetite in terms of stabilising the exchange rate?
A: We have introduced some flexibility in the exchange rate as it would help stabilise demand for imports and exports thus reducing the trade and current account deficits. At the same time, the Central Bank intervenes in the foreign exchange market to prevent excessive volatility in the Sri Lanka rupee/US dollar exchange rate as such short-term volatility could increase uncertainty for businesses and investments. This prudent management of the exchange rate has not only reduced the trade and current account deficits, but has also helped to maintain a comfortable level of external reserves.

Q: How confident are you about achieving the goals set for 2016 in terms of per capita GDP?
A: Sri Lanka has now entered an era of rapid economic and social progress reinforced by peace, long-term development plans, significant development of physical infrastructure, and a conducive business environment.

To accelerate the growth process, the economic drive will be centred on the five hubs and the tourism sector as the main thrust to increase the per capita income to reach the target by 2016. Sri Lanka has set an ambitious target of achieving a US $ 4,000 per capita income by 2016 and many initiatives have already been taken in this regard.

The key thrust will be on the five hubs and the tourism sector where a number of initiatives have been put in motion. Some are in the development stage, while others have already been implemented. The two prime areas will be to improve the ranking in doing business and infrastructure development. A lot of effort has been put into these fields to tide over the next few years.

12 Comments for “SL In Rapid Economic, Social Progress – CB Governor”

  1. renu

    Yes the glorified account the US $ is going upto unexpectd levels on the rupee

  2. Shaik Anwar Ahamath

    It has come as no surprise that our economy is sliding. My only surprise is it took so long. E.g. for reasons known only to themselves, the Exchange Control Directive to Banks operating the SIA Account in June was that the funds in the account cannot be spent in Sri Lanka other than for investments, unless the account holder is physically present in Sri Lanka. Therefore if you want to spend, E.g. to give to relatives, you first have to repatriate the funds to the foreign currency account you hold and spend from there, necessitating unnecessary conversions. The objectives are obscure except perhaps increased profits to the banks.

  3. Malcolm X

    This guy is a Classic Act.

  4. gamarala

    Why are there ‘beggars’ on roads with Samurdhi being implemented?
    Why no Social Insurance Scheme yet,like in many countries?

  5. lionel

    When will this rapid progress end to get relief to the people from high duties imposed on food items and essentials.The Govt must be having a plan and they cant go on telling the same every day.

  6. Wera

    Reminds me of a monkey praising its own tail. What a humbug.

  7. Gota the hero

    I cannot believe this retard is still the G of the central Bank. This ass wipe should be a toilet cleaner in the Central Bank toilets.

  8. Living the dream overseas

    Living on borrowed money and very soon the debt will burst and then SL will decend into a worse poverty situation than it is now.

  9. L.perera

    Economic growth may be for him and his boss you may see the growth by Forex rate of the rupee value.

  10. Renu

    This glorified accountant thinks that rest of the srilankans are fools, and have no idea about economics

  11. Tulani

    i do not believe Lanka will me moving anywhere with falsified information provided by the government. Lanka is a DICTATORSHIP COUNTRY. There is no progress at all since MR things highly of hmself

  12. len

    If you keep telling every thing is rosy Governor believes it will some how come true and he really believes it.

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