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 Economy  

Lukewarm response to 'Patriotic Bonds'


Bandula Gunawardena
and Nivard Cabraal

By Mandana Ismail Abeywickrema

While opposition legislators claimed last week that the Central Bank had only received a sum of Rs.17 million from the anticipated Rs. 50,000 million through the 'Patriotic Diaspora Bonds' launched earlier in the month, the Bank has remained tight-lipped about the response received.

The Central Bank launched a rupee denominated Treasury Bill and Treasury Bond targeting the affluent, patriotic Sri Lankan expatriate community abroad and its migrant workforce with the aim of attracting US$ 500 million into the country under the global marketing initiative titled "Sri Lanka - Now Is The Time!"

The 'patriotic bond' was launched to collect funds for 'development work' following the military victories gained in the northern battlefront.

The Central Bank is now actively engaged in promoting the Diaspora Bonds that were launched on February 4. The Central Bank launched road shows in several regions in which senior government ministers participated.

Road show

Minister Bandula Gunawardena travelled with Central Bank officials to the UK for the road show to promote the bonds.

Opposition legislators last week stated in parliament that while Gunawardena went to London recently to convince the Sri Lankan expatriates in that country, he had only managed to return with Rs. 17 million.

Gunawardena told The Sunday Leader that he was not aware of the amounts received so far through the Diaspora Bonds.

However, he said the road show in UK was a success, adding that the Sri Lankan expatriate community was told about the benefits of investing in the Diaspora Bonds.

He explained that the interest rate in UK stood at 1.5%, which is the lowest to be recorded in the past 315 years, and is also a minus rate when compared with the inflation rate.

Investment

According to Gunawardena, given the present conditions it was wise for the Sri Lankan expatriate community to invest in the Diaspora Bonds as it offered an interest rate between 15-17%.

The main feature of this investment is that people can withdraw their money at any given time and convert to any currency of their choice without any exchange controls. In order to build up more confidence, the Central Bank has created a 100% Sinking Fund for the purpose.

Diaspora Bonds were first issued by Israel in 1950 when the country was founded, targeting the large number of Jews living all over the world. Since there is a large community of Jews living outside Israel, it was successful in that country.

Expressed concern

Amidst much opposition by economic analysts as well as opposition legislators, the government raised a US$ 500 million loan from HSBC. However, economic analysts have now expressed concern over these monies that were raised claiming to be for development work.

Ajith Nivard Cabraal

Central Bank Governor Ajith Nivard Cabraal when launching the bonds told the media that last year alone Sri Lanka Diaspora had remitted US$ 3 billion to Sri Lanka. He termed it as 'best investment that a country could have at any given time.' "The capital that Sri Lanka gained through the remittances is the most stable of investments."

According to Cabraal, during the height of the global financial crisis, foreign currencies worth US$1.2 trillion left Asian shores to Europe and USA and in the case of Sri Lanka there was a total of US$ 650 million investment in the bond market and US$400 million withdrawn by foreigners during the height of the financial crisis last year.

Sri Lankan Diaspora

"Because of this reason we had to find new means and   that is why the Central Bank approached the Sri Lankan Diaspora at a time when the country needs their support to launch the development activities in the country. This was mentioned in our road map where we announced this scheme to widen the investor base by diversifying the government security market by offering access for Sri Lankans living abroad to invest in government securities in order to stabilise the government securities market," Cabraal was quoted as saying when launching the Diaspora Bonds.

According to statistics, there are about 1.5 million Sri Lankans who are either foreign residents or migrant workers. The main regions includes Middle East (Dubai, Abu Dhabi, Kuwait, Jordan, Lebanon, Qatar, Bahrain, Saudi Arabia and Oman), Europe (Italy, France, Switzerland, Germany, Netherlands and UK), North America (USA and Canada), and Asia Pacific (South Korea, Malaysia, Singapore, Japan, India and Bangladesh, including  Australia  and New Zealand).

Stimulus package to help all financial institutions

The cabinet of ministers was last week provided with a draft of the proposed stimulus package to help the financial institutions in the country.

President Mahinda Rajapakse last month met  representatives of financial institutions and he assured that the sector would be supported. 

Cabinet approval is expected to be granted at next week's meeting after the ministers study the proposals in the package.

The Central Bank on Friday issued a statement saying that following recent developments in global and local financial markets, some stresses have been observed in a few Registered Finance Companies (RFCs) and Specialised Leasing Companies (SLCs). As a result, public confidence in some of these institutions has eroded, creating an initial contagion effect, and therefore, there is a need to address the issue quickly.

Following the President's meeting with the financial institution heads in the country,  a stimulus package is now being introduced by the Finance and Planning Ministry and the Central Bank to support the regulated finance and leasing sectors.

The Central Bank in its statement has said that finance and leasing companies have been operating in the economy of Sri Lanka for many decades and now account for about 9 % of the financial sector. "Although the sector is relatively smaller in magnitude than the banking sector, its operations are spread throughout the country, thereby having an effect on economic activity in all parts of the country.  Moreover, these institutions have taken deposits from a large number of people and have provided financial facilities to an even greater number. Therefore, taking into account the need to maintain stability in the financial system, the Government of Sri Lanka, on the recommendation of the Central Bank, intends to introduce this stimulus package as early as possible."

The main objective of the package according to the Bank is to restore public confidence in the finance and leasing company sectors and bring normalcy to the system expeditiously.

The Bank has further stated that the stimulus package is estimated to have a value of around Rs. 4,250 million, and it will have two main features.

"Firstly, it will facilitate RFCs and SLCs to sell a part of their land stock to an Implementing Bank. Secondly, it will provide government guarantees on certain facilities to RFCs and SLCs granted by licensed banks and selected funding institutions. Accordingly, this package is designed to address the issues of liquidity and funding support in the above sectors."

The main features of the scheme are:

1. An RFC or SLC would be able to sell its land stock, at a price not exceeding 67% of the market value as determined by a licensed valuer acceptable to the selected Implementing Bank.  The settlement of the purchase consideration would be through Treasury Bonds maturing in two years.  Those Treasury Bonds may be discounted by the RFC or SLC in the secondary market for funding purposes.

2. Lankaputhra Development Bank Ltd. will be the Implementing Bank.

3. A government guarantee will be provided for licensed banks and approved funding institutions in respect of any facilities to RFCs and SLCs, including facilities granted in respect of securitisation, to a value not exceeding the amount availed of by such RFCs and SLCs as at 30.09.2008.  In addition, the Central Bank will request all licensed banks to continue their business with RFCs and SLCs in a normal manner.

4. Action will be taken by the Central Bank to reduce the liquidity requirement applicable to RFCs from 15 % to 10% of outstanding time deposits and from 20% to 15% of outstanding savings deposits. 

5. RFCs and SLCs obtaining the facilities or concessions under the new scheme, will be required to meet strict conditions as would be prescribed by the Central Bank that require them to cease transfer of funds of the company to related parties in any form, curtail remuneration and incentive payments of directors and key management personnel to prescribed levels, and provide periodic reports to the Central Bank on the performance and financial status of the company.  This type of strict control will be warranted, particularly because these institutions are being provided the stimulus package with public funds.

6. The Central Bank will in due course, consider the release of any funds available in its Medium and Long-term Credit Fund to support  this package.

7. All banks, RFCs and SLCs will be urged to reduce their lending and deposit rates by two percentage points in the near future.  This would provide an impetus to economic activity in the country and would lead to increased business for the industry.

8. The Central Bank will, in consultation with the Ministry of Finance and the respective institutions, take immediate steps to deal with the issue of repossessed vehicles and equipment in a manner that ensures that such assets are put into productive use, preferably by the original owners themselves. Therefore, a method will be formulated to address this matter, without the imposition of high repossession charges or penal rates of interest, since that would be far more beneficial to all parties.

It is expected that not only those RFCs and SLCs that are currently facing stress, but all finance institutions and leasing companies would benefit from this stimulus package as a result of the restoration of confidence in the industry.  Once implemented, all RFCs and SLCs, could continue to contribute effectively to the economic development of the country.


Slip is showing

Many attempts by The Sunday Leader to contact Deputy Governor, Central Bank Dr. Ranee Jayamaha over the telephone failed.

Following instructions by her secretary, The Sunday Leader then e-mailed her four questions to receive her official comment on the performance of the Diaspora Bonds so far and to confirm if the Central Bank had only received a sum of Rs. 17 million from the bond issue so far as claimed by the opposition in parliament last week.

However, even by Friday evening there was no response from Dr. Jayamaha and attempts to contact her over the phone also failed.

We publish below the questions posed to Dr. Jayamaha:

Q: How have the newly launched Diaspora Bonds been accepted by the Sri Lankan expat community?

Q: How much have they invested so far?

Q: How successful was the road show in the UK?

Q: The opposition claimed in parliament on Wednesday that the Central Bank has received only Rs. 17 million so far from the bonds. Is this correct?

 


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