Middle-income trap is Sri Lanka’s next challenge
Sri Lanka, in anticipation of reaching the US$4,000 per capita income in four years, must work towards moving beyond the so-called “middle-income trap,” a phenomenon that describes a country when its growth plateaus and eventually stagnates after reaching middle income levels, Central Bank (CB) officials said.
Delivering the introductory statement on the ‘Per Capita Economy’ at the Bank Directors’ Symposium on Wednesday, C.J.P. Siriwardena, Assistant Governor CB said that the middle-income trap which refers to the growth pattern on stagnated economies such as some Latin American countries has to be avoided. “Key challenges these ‘trapped economies’ face is the inability of their exports to compete against low income and low wage economies and highly skilled and innovative advanced economies,” he said, noting that in the early stage, growth of emerging economies are largely driven by increased utilization of untapped and underutilized resources, termed the “first wave of growth”.
When the force “Economic Gravity” which pulls back the economy dominates over the driving factors of the economy, countries end up in “stagnation”, he explained, noting that this situation could lead to “structural inflation”, i.e., increased wage levels with lower unemployment.
In Sri Lanka’s journey, the capital base in the banking system must be strengthened continuously, Mr. Siriwardena said. He added that the banking system needs steady growth of the capital base to facilitate rising credit demand and cushion any potential risk.
T. M. J. Y. Fernando, Director of Bank Supervision CB speaking on ‘Strengthening Resilience to meet Risks and Challenges’ said that this year the sector’s assets reached Rs. 5 trillion and loans surpassed Rs. 3 trillion. She said that the highest growth in assets of 22.2 per cent recorded during the last decade loan growth declined from 31.7 per cent to 26.4 per cent. “Assets mainly funded by deposits, however, borrowings increased. Gross NPL ratio increased from 3.8 per cent in end 2011 four per cent while provision coverage declined,” she said, noting that this year specific provision coverage of a few banks ranged between one per cent; 38 per cent, lower than the industry ratio of 40 per cent.
Banks are required to ensure adequacy of provisions to cover any potential losses, she said. She added that fraudulent activities have taken place with respect of loans against third party deposits, pawning transactions, withdrawing funds from customer accounts with general ledger vouchers and Internet-based credit card payments.
Addressing the causes for internal frauds, Ms. Fernando said that the failure to identify the lapses in internal controls early, not implementing the recommendations of internal audit and board audit committees, focusing on rapid branch expansion, undermining risk management, failure to recognize operational irregularities at branches, delay in apprising the boards on the frauds, no immediate actions on officers having unsatisfactory track record of credibility and integrity, not educating employees on the importance of “whistle blowing” policies, granting high delegated authority limits for cash back facilities and failure to implement a strict mandatory leave policy stand top on the list.
Mr Siriwardena said that corporate bond markets will get new life and long-term external financing is likely to be at lower costs. “Corporate bond market outstanding is to increase from around Rs. 100 billion to Rs. 1,000 billion by 2016.” He added that the complementary effect of availability of long term funds and growing corporate sector will drive the corporate bond market, while international investors’ confidence in country will lower the country’s borrowing cost from international capital markets.
The symposium which was titled as positioning the banking sector for the post $4K per capita era was held with the participation of over 200 directors and Chief Executive Officers of 24 licensed commercial banks and nine licensed specialized banks.
Ajith Nivard Cabraal, CB Governor delivering the keynote address said that banks connected to conglomerates need to be mindful of the risks associated with such businesses. “I know many of you are not only looking at the banking sector but you have other businesses as well, in good times if the other sectors are doing well it can supplement your bank. It will give the necessary impetus to the bank as well. And the bank can also provide support to the other sectors. But in difficult times you need to concentrate on ensuring that conglomerate risks are also taken care of.” Mr. Cabraal said that as conglomerates grow there are inter linkages, there are influences that could take place from one type of industry to another.
“In such a situation if there is a risk to the banking sector, it is not a standalone risk. That is why we are so keen about ensuring that the overall conglomerate is manage very effectively in time to come. And as it grows the risk can become greater, so therefore the mitigation practices that have to be introduced will be greater,” he said.
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