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A senior banker pointed out that a presentation by the Central Bank Governor on the economy at a meeting with President Rajapaksa and heads of commercial banks last week had its fair share of misconceptions while his inferences on the data were very subjective.
He also said banks are willing to reduce lending rates but it would take time because existing deposits are contracted at higher rates of interest but warned that authorities need to rectify economic fundamentals if economic activity is to gain momentum after the conflict and bank credit is to be put into real economic use.
"President Mahinda Rajapaksa asked us to bring down our interest rates and we are glad to comply but it could take some time," Rienzie T. Wijetilleke, Chairman, Hatton National Bank PLC said.
Wijetilleke’s banking experience goes back to almost 50 years, and 21 one of them as head of Hatton National Bank PLC. He says bankers have been hauled before each President From the time of J. R. Jayawardena with requests to slash interest rates.
"I have been to each one of them. But this time it was different," Wijetilleke said adding that the Central Bank governor had made a presentation at the beginning of the meeting that seemed to create a misleading picture.
Interest rate will come down…
"For the past one and a half years there has been a rapid rise in interest rates and banks were compelled to increase their deposit rates to about 19 to 20 percent. This compelled banks to reluctantly increase their lending rates as the cost of funds increased," Wijetilleke said.
But in recent weeks for understandable reasons such as the lack of credit growth the Central Bank has taken definite steps to reduce the statutory reserve requirement, short term interbank rates and Treasury bill rates in a bid to reduce lending rates to stimulate the economy.
Wijetilleke pointed out however, that because of the deposits contracted at higher rates it would not be possible to reduce rates over night.
"But I assure all banks would gradually reduce their lending rates," he said.
Interest rates began to rise over the past one and a half years or so as the Central Bank tightened its monetary policy with the intention of cutting the growth of credit, as interest rates increase, in a bid to contain inflation. It seems to have worked with inflation now at a single digit level.
The Central Bank has eased its monetary policy and expects interest rates to come off overnight. In the past, the Central Bank had repeatedly said the affects of a tight monetary policy would be felt much later because of the time lag. Should it not expect a time lag for interest rates to come down when its monetary policy is eased?
Wijetilleke believes there are many other factors that will have to be set right if authorities are keen to promote credit growth.
"With the end of the conflict situation we can all expect a lively environment for economic activity and banks will have a greater role to play in this. However, in the present context banks are not in a position to lend because there is an erosion of confidence," he said.
Agriculture and SME sectors…
"The president said banks are not lending enough to the agriculture and SME sectors but many of the banks have been lending to these sectors. In the case of HNB we have been actively lending to these two sectors through our extensive branch network," Wijetilleke said.
However, Wijetilleke said low interest rates alone will not help these sectors, especially in the case of the agriculture sector unless farmers and cultivators have access to markets and better prices.
"Although paddy prices have been somewhat stable this is not the case with vegetables and many cultivators had to dump their produce for the lack of market access and a fair price. This is an issue that must be resolved by authorities," he said.
They will not borrow…
Wijetilleke said people are not willing to borrow in the present economic environment.
He said high interest rates, stagnant economic activity, delayed payments, narrowed margins, additional taxes and a reluctance to expand overheads not knowing the future are forcing companies to defer their borrowings.
Facts or myths…
When President Rajapaksa met bankers last week, the proceedings took off with a presentation by the Central Bank Governor Ajith Nivard Cabraal where he attempted to portray Sri Lanka’s economic growth as strong, sustainable and resilient.
"There was a problem with some of things he told us," Wijetilleke said.
Cabraal said Sri Lanka’s unemployment rate had declined gradually to 5.2 percent in 2008, the lowest in a decade.
"This is not comforting. The main reason for this is the mass recruitment to the security forces and private security firms. In HNB Towers we have increased our security three fold over the last few years.
"What we need to find out is whether these jobs adds new wealth and activates the economy. The biggest question we need to ask is what will happen to this men and women once the security situation improves and they become redundant. Therefore the unemployment rate is not a positive factor," Wijetilleke said.
Cabraal is also reported to have told the bankers that exports and remittances have together exceeded imports for the first time.
"But this too is a blatant misconception that every thing is all right. We all know that last year, oil prices were about US$ 150 a barrel and that its only one third of it now. Prices of many other commodities have also come down, and due to the economic uncertainties and the global crisis many businesses have considerably reduced their import volumes.
"The drastic drop in import of vehicles is the best example that the Rupee value of imports have therefore considerably reduced," Wijetilleke said.
Imports for January-February 2009 have declined by 37 percent compared to last year. Exports have declined by about 10 percent.
"Workers in the Middle East are the main source of remittances into the country and with oil prices one thirds of what they used to be, Middle Eastern economies have contracted, incomes are taking a hit and jobs are being cut. So how can we believe that remittances would improve?" Wijetilleke asked.
Impending political decision to stabilise Rupee at 115 against dollar
Wijetilleke reports that President Rajapaksa
wanted banks to stop manipulating the exchange rate as the government may
be compelled to make a political decision to fix the rate at Rs.115
against the dollar.
"The banks assured the president that the fluctuation of the exchange rate
was based on demand and supply in the market. The biggest players in the
foreign exchange market are the two state banks Bank of Ceylon and
People’s Bank, private banks have no room to manipulate the market,"
Wijetilleke said.
