During recent times, the Central Bank had made certain decisions which had affected the day-to-day life of Sri Lankans and impacted the future of many enterprises critically.
The initial stage had been to settle a due on Bonds to the value of US $ 500 million when the market value had been around 50% thus diluting the meager reserves. Few months later we default on a due international loan for a much lesser amount terming the nation bankrupt.
Wouldn’t it been a better decision to seek an extension on the Bond settlement and settle the lower amount on the loan repayment and save the country of the ignominy of a bankrupt country.
The next issue of contention which made negative, many banks’ credibility internationally was when Usance Letters of Credit were forced on the importers extending to 90 and 180 days. Just evaluate the cumulative effect on the limits on LCs granted by international corresponding banks for such long durations.
Due to this process we not only eroded our confidence with international banking institutions but also could be still paying for items consumed 90 or 180 days ago.
The release of US $ 5.5 billion to maintain the parity rate of the Dollar at around Rupees 203 could be termed as the most serious.
This endeavour not only evaporated our reserves but also paved the way for an ‘undial’ operation to secure more that 50% of the usual foreign remittances received through licensed banking institutions in Sri Lanka from August 2021 onwards. The disparity between the trading values of the Dollar against the controlled figure of Rupees 203 created further mayhem in the currency market.
Then on 8 March 2022 the flood gates opened and the Rupee was floated resulting in the exchange rate escalating to almost Rupees 400 in the black market and Rupees 375 at local Banks.
This resulted in all imports becoming dearer by almost 200% of an import based economy creating in economic terms ‘galloping inflation’ with hitherto unheard price escalations.
The latest endeavor was huge increases of interest rates by 600 basis points an unheard level in Sri Lanka with the Treasury bill rates reaching halcyon heights of over 24%.
The resultant interest rate of around 20% on fixed deposits made many depositors withdraw the deposits existing at around 5% and redeposit as new. Thus the Banks now have to bear the added cost with the fixed rate lending prevalent at around 10% prior to the increase.
Think of the plight of SMEs with advances at AWPLR plus. Further, the Governor had decreed no more concessions or moratoriums. In January 2020 the ‘Credit Support’ scheme was introduced to assist the SMEs to recover from a downturn in economy due to Easter tragedy and negative political issues. Moratoriums granted extended to ‘Covid-19 affected business enterprises’ in March 2020 until March 2022.
Has the situation changed for the better then and now? If no concessions are granted, the SMEs will be faced with a natural death resulting in a negative growth rate for the country. The country is much dependent on SMEs which generate more than 50% of the GDP and if that happens, it may be an unredeemable long term calamity.
The writer is a management consultant
By G. Ruwan