Economy in a tailspin
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It’s not difficult to fathom why the economy has been reeling in the first half of 2022 with many adverse economic developments.Commercial banks, in particular, have seen their profits drop – a significant development given that banks have had a good run in recent years with high profits – and the change is largely due to high impairment provisioning (for bad debt) as industries struggle to survive.
With moratoriums on loans being continued due to sluggish economic conditions as small and medium enterprises struggle through the crisis, profits at banks have been dented.
Walking to the kitchen to pick up my breakfast and tea, my thoughts were also on another development – rising interest rates – when the home phone rang. It was Ruwanputha, my young economist-friend, on the line.
“Hi… how are you? There seems to be a lot of developments in the banking sector these days,” he said.
“Yes, profits of banks have come down due to large-scale provisioning for bad debts,” I said.
“Impairment provisioning is high because of concern about local debt being restructured based on President Ranil Wickremesinghe’s recent statement which has created a stir in the banking sector. This could trigger a banking crisis and create further problems in the economy,” he said.
“This appears to be one of the worst periods for banks. Normally, banks set the trend and this means that the economy is in a really bad shape,” I said, discussing with him other recent developments in the economy. Incidentally Central Bank (CB) Governor Dr. Nandalal Weerasinghe told reporters on Thursday that there has been no intimation to the CB on restructuring domestic debt.
Industry and the private sector have been adversely affected by the fuel crisis and other shortages in the first half of the year. Then in April, the Governor announced a major hike in interest rates and at the same time, along with the then Finance Minister Ali Sabry, revealed that the country would resort to a temporary default in repayment of its foreign loans totalling US$51 billion.
The government is working with a foreign advisory team to restructure the debt and discuss repayment schedules with overseas creditors, while a bailout package with the International Monetary Fund is on hold until a foreign debt restructure schedule of repayments is in place.
The default has led to the country’s rating being downgraded by key rating agencies. Now the government is considering a similar restructure of domestic debt which is said to be in trillions of rupees and would adversely affect banks and mainly state banks which have enormous funds in Treasury bills, bonds and other sources of government debt.
For the record, here is a sample of high impairment provisioning in key commercial banks for the 6-month period ending June 30, 2022:
Commercial Bank: The group reported impairment charges and other losses totalling Rs. 35.219 billion for the six months and Rs. 29.258 billion for the second quarter alone, reflecting increases of 157.93 per cent and 350.24 per cent respectively.
Seylan Bank: The total impairment charge was Rs. 11 billion for Q2 2022 compared to Rs. 4 billion reported in the corresponding period of last year, representing a 183.49 per cent increase. “The bank increased the impairment provision to capture the impact on emerging global and local economic challenges and the credit risk profile of the customers,” it said.
NDB: The period under review saw the bank booking impairment charges of Rs. 13.9 billion, an increase of 235 per cent over the comparative period. The greater portion of impairment charges comprised provisions made for foreign currency denominated government securities, factoring in the revisions to the sovereign rating of the country earlier this year on account of the country’s debt restructuring measures and the impact arising from rupee depreciation.
Sampath Bank: The bank recognised a total impairment charge of Rs. 28.2 billion for 1H 2022 compared to Rs. 5 billion reported in the corresponding period of last year, representing a 464 per cent increase.
The economy is heading for the worst times in September/October with an expected production drop in rice. According to an official report, the United Nations estimates that 5.7 million people in Sri Lanka need humanitarian assistance, with 4.9 million – 22 per cent of the population – being food insecure, meaning they do not have consistent access to adequate, nutritious food. Families were already struggling from the pandemic, with 36 per cent reporting reducing their food consumption in a UNICEF survey in late 2020. That number doubled to 70 per cent in a survey conducted in April 2022, just as the economic crisis hit, official data showed.
The cost of funds to the private sector is also rising with high interest rates. The Central Bank, during its monthly review of the economy on Thursday, announced no change in the policy interest rates which since April 2022 stood at 14.50 per cent (Standing Deposit Facility Rate – SDFR) and 15.50 per cent (Standing Lending Facility Rate – SLFR).
In the meantime, banks have announced very attractive interest rates ranging from 20 per cent to 22 per cent for 100-day to 300-day deposits resulting in a scramble in the market with depositors pulling out their funds in lower interest-rate fixed deposits and reinvesting under the new interest rates’ regime. While this would mop up savings in the economy, it would affect the private sector’s cost of funds.
The past six months have been one of the worst periods in the economy. There is a general theory that if banks are not doing well – in this case a drop in profits – then the economy is in a tailspin. The economy is expected to contract by 8 per cent (minus growth) this year as more problems evolve in the coming weeks largely due to a shortage of foreign exchange. Further compounding the problem is the breakdown at the Norochcholai coal power plant which could trigger power cuts of more than three hours in the coming weeks, further impacting industrial production. Adding to the stress is the sharp hike in electricity rates by more than 75 per cent.
As I wound up the column, I was distracted by the conversation under the margosa tree. “Anduwe ispirithalawala beheth dedi hingayak thiyenawa (There is a severe shortage of medicines in government hospitals),” said Kussi Amma Sera.
“Mage nangi eyage diyawediyawata Anuradhapura ispirithaleta giyahama egollo kiwwalu beheth pitin ganna kiyala (My sister had gone to the Anuradhapura hospital for her diabetes and had been told to purchase the medication from outside),” noted Serapina, while Mabel Rasthiyadu added that “mage gamey nade kenek pharmacy gananawakata gihin thiyenwa eyage beth hoyaganne (a relative from my village had to go to several pharmacies before she found one which had the drugs she required)”.
The drug crisis is one of many drawbacks in the economy which would trigger further shortages in the second half of this year.
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