LITMUS TEST

Compiled by Yamini Sequeira

NOW OR NEVER FOR SRI LANKA!

Ranjith Kodituwakku expects a restoration of stability within two years

Sri Lanka’s economy is currently facing unprecedented stress. Over the past several years, it has witnessed a series of shocks. Both 2017 and 2018 saw subdued growth of 3.6 and 3.3 percent respectively, primarily due to adverse weather conditions impacting agricultural throughput. This was followed by the Easter Sunday attacks in April 2019 and the first COVID-19 lockdown in March 2020.

Over the last eight months alone, the economy has seen its useable foreign reserves dip to less than US$ 50 million. The shortfall in terms of foreign currency liquidity worsened when economic activity was brought to a complete standstill in 2020 and the rupee was devalued by over 80 percent.

THE BACKDROP Since Sri Lanka is an import oriented economy, this sent inflation soaring to 64 percent. As a curtailment measure, interest rates have risen to an all-time high of almost 30 percent. Needless to say, the banking sector as the backbone of any economy is at the forefront of such challenges.

Ranjith Kodituwakku asserts: “Even against this extraordinary backdrop, the banking sector has a dual role to play. First, banks must help customers in their time of need; and second, they have to safeguard their own balance sheets by navigating these times with the utmost vigilance and prudence. Banks’ foremost responsibility is to preserve and protect depositors.”

“With the country’s economy likely to contract by nearly 10 percent this year, the focus of all businesses – regardless of their size, scale and nature; and in particular SMEs and MSMEs, which account for over two-thirds of the economy – is to adopt, adjust and scale their respective businesses in line with the times in order to survive,” he states.

From a debt servicing perspective, Kodituwakku points out that many banks have extended moratoriums and offered working capital facilities. Some have also taken it upon themselves to provide technical support and financial management advice as value added services.

The veteran banker notes that the banking sector is currently dealing with multiple stresses across many fronts: “From an earnings standpoint, maintaining positive bottom lines is now under threat from three different aspects of business.”

Kodituwakku explains: “Firstly, from a net interest income perspective, which accounts for close to 75 percent of the sector’s top line and its margins – they’re under pressure due to the heightened interest rate volatility. Secondly, due to dimini­shing customer debt servicing abilities, expected loss provisioning has risen sharply. Thirdly, due to the rupee devaluation, high inflation driven costs are escalating.”

FOREX LIQUIDITY From a foreign currency liquidity perspective, he notes that this remains a direct function of the country’s forex reserves and sovereign rating. The latter’s downgrade in mid-2020 saw the banking sector’s access to foreign funding, and readily available facility lines and limits with international counterparties instantaneously lost.

Trade finance limits by foreign counterparties are also under strain. This in turn has adversely impacted the smooth functioning of the banking sector and thereby, the overall economy.

Any forward movement on this front now hinges on sourcing new sovereign level foreign funding, and the ability to meet the requisites for long-term debt sustainability such as fiscal consolidation and public sector reforms, as well as improved social spending and governance.

On the capital front, he asserts that “these challenging times have forced many institutions to take early measures to augment their capital base in order to maintain continued safety and stability – more so, considering the unforeseen. That said, market conditions do present challenges too.”

THE BRAIN DRAIN From an operational point of view, the brain drain – as seen particularly over the last several months – is another aspect to be dealt with. Retaining and attracting good new talent is not easy… and more so, under the present circumstances.

This has forced institutions to further expand their digitalisation efforts to cover other aspects of manual intensive processes, and rationalise branch and service centre networks.

As for the strength and stability of banks, Kodituwakku explains: “Over the past several years, the banking sector has demonstrated its resilience thanks to prudent measures introduced by the regulator – including, amongst others, the Basel III framework, which was rolled out in several phases starting from early 2015.”

“This has forced the banking sector to maintain higher buffers in terms of both liquidity and capital as a means of planning for the unforeseen. And it has ultimately enabled us to withstand these challenges. Needless to say, if not for them, our collective capabilities would have been far different,” he posits.

PERFORMANCE On the sector’s performance outlook, Kodituwakku says: “With the economy set to contract this year, most banks’ balance sheets – similar to most businesses – are likely to contract.”

“Profitability is not the central focus this year; but from an operational perspective, it’s about bolstering liquidity, strengthening capital and challenging the status quo, to bring about productivity and efficiency improvements through digital and other means,” he adds.

Kodituwakku continues: “The next few months will be decisive for the banking sector and the country in general. Year 2023 will likely present a similar set of challenges; and as a matter of fact, we will face the knock on effects from 2022. Nevertheless, a recovery in 2024 is very likely if all that needs to be done is put into action.”

Talking about the economic outlook, he asserts that “the process of recovery will be long and arduous, which hinges on many moving parts. However, I remain optimistic that we are currently on the right path to recovery and the changes that need to take place are in progress.”

“More importantly, this is likely to take place under the guidance of the IMF, World Bank and other bilateral agencies, and will shape the country’s future for the better,” he affirms.

Kodituwakku concludes: “The country also benefits from (among many other factors) its strategic geographic positioning, abundant natural resources, a highly literate population and extraordinary tourist attractions with world renowned hospitality.

He adds: “And with the right policies, we can recover in the next two years or so. It is now or never!”

The interviewee is the Chief Executive Officer and General Manager of People’s Bank.