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For Not Going To Int’l Capital Markets

  • PBJ Threatens To Cancel Banking Licenses

A government official threatened to cancel the licenses of certain banks if they don’t go to international capital markets to raise money.

Treasury Secretary Dr. P.B. Jayasundera speaking at a budget seminar in Colombo on Friday (November 22), referring to two commercial banks in particular alleged that they were seeking for Government guarantees on the exchange rate (ER) risk to raise such funds.

“I will take this matter up with the Monetary Board which is meeting today (November 22) and seek the cancellation of their licenses,” he alleged.

The Head of the Monetary Board is Central Bank of Sri Lanka Governor Ajith Nivard Cabraal, while Jayasundera in his capacity as Treasury Secretary, ipso facto is also a Board member of the Monetary Board.

President Mahinda  Rajapaksa presenting Budget 2013 in Parliament last year said that DFCC Bank and NDB Bank will be encouraged to go to capital markets to raise US$ ($) 250 million each in order to fund the SME sector.

For Not Going To Int’l

Rajapaksa in his speech also said at that time that the possible ER risk in such a venture would be underwritten by the Government.

Meanwhile Jayasundera continuing said that DFCC Bank has gone to international markets and had allegedly raised euro 90 million.

$ 1 to 1½ billion in external finance is needed, which may be raised by a mix of concessional and commercial funding, said Jayasundera.
He also said that banks should lend to sectors such as agriculture and not to trading.

On the issue of agriculture productivity, economist Dr. Indrajit Coomaraswamy speaking at a seminar recently said that Sri Lanka employs 32% of its labour force in agriculture, which in turn produces only a third of that figure in GDP terms, mainly 11% to the country’s economy (see the business pages of The Sunday Leader in its issue of 21.7.13.).

Jayasundera said that Budget 2014 has a focus in dissuading certain agriculture imports which crops may be grown here.

When this reporter asked him as to whether the 2% NBT tax on banks, another 2014 Budget proposal, would be detrimental to lowering lending rates, he said that space has already been created, in terms of making liquidity available, due to CEB once more becoming profitable and CPC on the verge of breaking even.

This would release multi billion rupees worth of liquidity, which, otherwise would have had tied down the two state banks, namely Bank of Ceylon and People’s Bank, the two main lenders to these two state utilities, to bail them out.

Additionally, after the VAT on financial institutions such as on banks was reduced from 20% to 12% in a previous budget, with the savings (difference) locked in to a separate account to fund SMEs, that money too has now been released to banks to further strengthen their liquidity positions, he said.

That therefore would give them space to reduce their lending rates, said Jayasundera.

With rains being good like this year for hydro power generation, in a similar situation like today, CEB made profits in 2010, with its bottomline fielding a figure of Rs. 2.4 billion.

But the following year a drought enveloped the country, making CEB to seek after the more expensive fossil fuels to generate electricity, resulting in this state utility making a loss (see also the business pages of The Sunday Leader of 20.2.11.).

Therefore, being dependent on the weather for the sustainability of these two energy utilities may not be the right approach to bet your money in, in the recovery of CEB and CPC, with the latter’s fortunes intrinsically linked to the performance of the former.

Jayasundera also said that the budget encourages the consolidation of financial institutions, in particular banks and finance companies.

But a director of a blue chip firm which firm has a major stake in a private bank told this reporter that bank consolidation doesn’t operate in a vacuum. “It won’t work if there are no labour reforms, one cannot afford to have two back office operations,” he said.

Jayasundera said that though revenue has fallen, recurrent expenditure, as a percentage of GDP, has also declined, from 20% in the 1977 to the 1980s period, to 14% currently, squaring off the revenue deficit.

The budget is being consolidated, with the deficit narrowing each year. Public investments will be maintained at the 6-7% level. There shall be no privatization or listing of state owned enterprises, said Jayasundera.

Public investments however will not reach the abnormal heights seen in the immediate aftermath of the post 1977 period when inflation also rose to the double digit level, he said. Inflation has currently been contained at the single digit level, he said.

Debt to GDP ratio will be brought down to 65%.

Revenue loss due to water leakages in the Colombo metropolitan area is 50%. This shall be patched through a $ 300 million ADB loan.

Computerisation will link up revenue generating authorities, thereby helping to cast the net on tax evaders.

New markets such as in the South Americas, South Africa, China, Japan and India need to be sought after over and above the traditional western market.

Threshold on retail outlets’ VAT was lowered from Rs. 500 million per quarter (Q), to Rs. 250 million per Q in Budget 2014.

The seminar was organized by Ernst & Young.

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