Five epochs of domestic credit’s 41-year- old saga from 1981 upto now

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Sri Lanka’s 41- year-old domestic credit journey, vis-à-vis such credit extended to it by the local banking sector together with its monetary authorities, beginning from 1981 to June 2022, according to latest Central Bank of Sri Lanka (CBSL) available data as at Thursday (25 August), on a monthly basis, can be broken into five epochs.

They are from January 1981 to July 1983, August 1983 to December 1988, January 1989 to October 1989, November 1989 to July 2021 and lastly from August 2021 to June 2022. Prior to 1981, such data is hazy.

Meanwhile, in the period January 1981 to July 1983, spanning a total of 31 consecutive months, domestic credit extended by the local banking sector together with the monetary authorities, cumulatively, to the Government of Sri Lanka (GoSL) and to its allied agencies such as public corporations were greater than such domestic credit, cumulatively extended towards the private sector. The private sector is the engine of growth.

However, from August 1983 to December 1988, a period of more than five years (64 consecutive months), domestic credit extended by the monetary authorities and the domestic banking sector to the private sector, was greater than such cumulative credit provided to the GoSL and its agents, such as the aforementioned GoSL owned and run corporations, together.

Nonetheless, in the 10-month period from January 1989 to October 1989, domestic credit extended by the monetary and the local banking sectors, cumulatively to the GoSL and its agents, together, was greater than such credit extended to the private sector.

 Pvt. sector

But, in the ebb and flow in the disbursement of domestic credit to these two key players in Sri Lanka’s economic landscape, ie the private sector and the GoSL and its agents together, in the near 32-year period (380 consecutive months) from November 1989 to July 2021, such credit extended to the private sector by the country’s banking sector and the monetary authorities was greater than what was cumulatively extended to the GoSL, together,  to its (GoSL’s) allied agencies as well.

Albeit, once more in a reversal of fortunes, where such domestic credit extended by Sri Lanka’s monetary authorities together with its banking sector to the GoSL and to its agents, in the 11-month period from August 2021 to June 2022 was greater than such cumulative credit extended to the private sector once more, according to latest available CBSL data.

Mahaweli Hydro

To describe the reasons behind these five credit epochs, the first of such epochs, ie from January 1981 to July 1983, was the zenith of the multibillion rupee accelerated and sustainable Mahaweli Development Project, built and successfully developed with the cumulation of, principally, grant and concessional aid from the West and Japan, coupled with counterpart funding from the GoSL.

This domestic or local counterpart funding, though infinitesimal compared to overseas grant and concessional aid that propelled the multibillion rupee accelerated Mahaweli Development Project to a successful finish, nonetheless, vis-a-vis the totality of the country’s domestic credit landscape, loomed relatively large, larger than such credit extended to the private sector. Hence, domestic credit extended by Sri Lanka’s monetary authorities and the banking system to GoSL and its agents, was greater than credit extended to the private sector in the period January 1981 to July 1983, regardless of the fact that the private sector is considered as being the engine of growth, when comparing with the immense economic benefits derived from the Accelerated Mahaweli Development Project, leave aside agriculture, on electricity/power generation alone. ‘Mahaweli’ was more than a Sustainable Infrastructure Development Project and is not a white elephant. The ‘Mahaweli’ has given manifold ‘return on investments’ to the country since its basic infrastructure was completed in the early to the middle 1980s.

For example, according to the Central Bank’s 2021 Annual Report, the cheapest source of electricity generation to the Ceylon Electricity Board (CEB) last year was ‘CEB Hydro’, costing a mere Rs 1.67 a unit or per one kilo Watt hour (kWh) of electricity followed by Coal (Rs 10.87); non conventional renewable energy (RE) such as Mini-Hydro, Wind-both CEB and private sector (PS), Biomass and Solar (Rs 18.99), ‘CEB Diesel’ (Rs 29.01) and ‘PS/Independent Power Producers’ (IPP’) Diesel’ (Rs 30.35), respectively.

In this connection, cheap and clean RE provided over 50 per cent of Sri Lanka’s  daily electricity needs in 39 (54.17 per cent) out of the 72 days to last Friday (19 August), CEB’s last Friday’s  data showed.

Meanwhile, in 32 (44.44 per cent) of the remaining 33 days to last Friday, over 50 per cent of the island’s daily electricity needs were met by the pollutive and imported fossil fuels (FFs) comprising coal and diesel and in the other single day (1.39 per cent), splits were evenly (50:50) shared between FFs and RE, respectively

Consequently, RE led by ‘CEB Hydro’ provided over 50 per cent of Sri Lanka’s electricity demand for 20 consecutive days to last Friday, with last  Friday’s ‘CEB Hydro’ percentage figure alone being  equivalent to 81.25 per cent of total RE, CEB statistics further showed.

Of the total electricity supplied by the CEB to consumers in Sri Lanka last Friday which was  40.79 giga Watt hours (gWh), FFs share was 16.95 gWh (41.55 per cent)  and RE’s share was 23.84 gWh (58.45 per cent) respectively.

Last Friday’s FFs breakdown comprised CEB Coal 6.51 gWh, PS/ IPP’ ‘Diesel’ 6.17 gWh and ‘CEB Diesel’ 4.27 gWh, respectively, data showed. Last Friday’s RE breakdown comprised CEB Hydro 19.37 gWh, followed by PS Wind 1.34 gWh, CEB Wind 1.28 gWh, PS Mini-Hydro 1.27 gWh, PS Solar 0.33 gWh and PS Biomass 0.25 gWh, respectively.

‘CEB’s Hydro’ breakdown of  last Friday comprised Mahaweli , led by the hydroelectric power plants built in respect of the above Accelerated Mahaweli Development Programme  10.57 gWh, equivalent to 54.57 per cent of total ‘CEB Hydro’, Laxapana 7.04 gWh (36.34 per cent) and Samanalawewa (ie both Samanalawewa and Kukule Ganga Hydroelectric Power Projects ) together, 1.76 gwh (9.09 per cent). 

Therefore, it may be construed that though domestic credit extended to the public sector in the period 1981 to July 1983 was greater when compared to such credit extended to the private sector, but, in the backdrop that such a phenomenon was led by the ‘Mahaweli’, where the country continues to derive immense economic benefits from such a project, the fact that the private sector was dwarfed by the public sector during the reference period, was not a disadvantage to the economy.

Private sector got its act together

Nonetheless, the private sector got its act together in August 1983, ie six years after the country opened up its economy with the change of Government on 21 July 1977. Consequently, domestic credit extended by the monetary authorities together with the Sri Lankan banking sector, for a consecutive period of 64 months, beginning  from August 1983 and ending  on December 1988, was greater than such credit cumulatively extended to the GoSL and its agents. This is the second phase of Sri Lanka’s domestic credit saga, since such data was comprehensively collated, beginning with the year 1981.

Nevertheless, in the 10-month period from January 1989 to October 1989, ie in the third phase of the island’s domestic credit saga, the private sector once more took a backseat, with credit extended by the domestic banking sector together with the monetary authorities to the GoSL and to its agents, being greater than such credit extended by them to the private sector.

The reason behind this phenomenon was threefold. They were, the uncertainty caused in the minds of the private sector after President Ranasinghe Premadasa was elected to power at the presidential poll of 19 December 1988 and taking over from President J.R. Jayewardene who went into retirement on 1 January 1989 and the other two reasons being, the IPKF fighting the LTTE in the North and East of the country and the JVP fighting the GoSL in the rest of the country,   thereby resulting in the whole country being in flames, an environment not conducive to private sector credit growth and development.

Collapse

However, in the fourth phase of this saga,  coinciding with the killing of JVP leader Rohana Wijeweera by the Army on 13 November 1989, thereby resulting in law and order once more being restored in the ‘South’, private sector credit once more overtook credit extended to both the GoSL and public corporations together beginning from that month (November 1989), before its collapse nearly 32 years (380 months) later in August 2021 (the current fifth phase), whilst continuing to play second fiddle vis-à-vis credit extended to the GoSL and public corporations together for 11 consecutive months to June 2022, according to latest CBSL data.

 In the above mentioned ‘South’, that also includes the Western Province which also comprises Sri Lanka’s commercial capital Colombo, the fulcrum of both the island’s private sector as well as of its economy.

In related developments, the reason behind private sector credit taking a backseat since August 2021 to June 2022 according to latest data, ie covering the current fifth phase of Sri Lanka’s domestic credit journey according to CBSL’s latest data, was due to the uncertainty caused after the election of Gotabaya Rajapaksa from the SLPP at the 17 November 2021 Presidential Poll as Sri Lanka’s new President.

 However, Rajapaksa resigned from his post on 13 July 2022 due to mass protests, caused by the astronomical record rise in the cost of living, coupled with shortages of essentials, queues, rationing, a black market, bribery, corruption, cronyism and nepotism due to a US dollar shortage in the country as Sri Lanka is an import dependent economy, a fallback effect, mainly caused by corruption that took place during Rajapaksa’s elder brother and SLPP leader Mahinda’s near 10-year presidency from 16 November 2005 to 8 January 2005.

First published in 1981

Meanwhile, CBSL first started publishing such monthly comparisons of domestic credit in the public domain only 41 years ago in 1981. Prior to that, such comparisons were available only on a yearly basis (not monthly) and that too covering a spartan 13-year period from 1968 to 1980.  Such annual data too showed that credit extended to the GoSL together to its allied agents were greater than that which was extended to the private sector.

In related developments, in the period 1956 to 21 July 1977 Sri Lanka practised a closed economy where the private sector played second fiddle to the GoSL and to its agents in the island’s political landscape.  In similar developments, such comparative data, even annually, is not immediately available prior to 1968 and, even if available, is unclear, by not separately compartmentalising domestic private sector credit and domestic credit to the GoSL and to its agents, to make effective comparisons. However, as Sri Lanka practised a closed economy from 1956 to 1977, it may be safely assumed that at least in the period 1956 to July 1983, a near 27 year period, domestic credit extended to the Government and to its agents, together, exceeded such credit extended to Sri Lanka’s private sector in the review period, be it monthly, or, annually.

 Cause

Meanwhile, the cause for the current saga, where, rupee or domestic credit extended by Sri Lanka’s banking and monetary sectors to the GoSL and to public corporations overshadowing credit given to the private sector for the eleventh consecutive month to June 2022 according to latest CBSL data is due to consumption and not due to development, which was the case of the latter covering the period July 1977 to July 1983, whereas in the case of the former, largely led by the lack of revenue in GoSL’s coffers, leading to record trillions (1,000 billions) of rupees of money printing to fill this shortfall.

The situation has been made worse by record high inflation, tempered with uncertainty, both in the domestic and external fronts, making the private sector to adopt a ‘wait and see’ attitude, post 16 November 2019 Presidential Polls at the expense to the economy.

The primary cause for the current crisis is the lack of US dollars in the country, a phenomenon last seen 45 years ago in 1977, when Sri Lanka practiced a closed economy. However, the cause of the lack of dollars currently is due to corruption at the highest level, resulting in the siphoning off, of the country’s dollar assets and not due to the country practising a closed economy.

Chinese Checkers

Sri Lanka is currently negotiating for an IMF loan to overcome this morass. But the achilles’ heel is China; which, for political reasons does not want its credit to Sri Lanka restructured unlike the ‘G7’ nations, thereby seemingly stultifying the IMF loan.

 China’s idea of restructuring Sri Lanka’s debt is to offer a new loan of unknown interest, to settle its previous loans owed to it by the island. One way of getting over this difficulty is to name and shame China for their recalcitrance, in order to make them fall in line with the rest of the world.

 If China continues to be stubborn,   domestic credit extended to the GoSL and its agents will also continue to overshadow such credit extended to the private sector, similar to the conditions that prevailed from 1956 to July 1983, at the expense to the economy.

By Paneetha Ameresekere