Queen Street Meltdown
Mawella K Prematilleke
MBS (UOC SL), PGDED (UOC SL)
DIP BANK MGT (IBSL SL), DIP BANKING I (IBSL SL)
Fiji National University
19th June 2018
The Economy in Sri Lanka, was one of the promising Economic models in Asia, systematically started to decline during last half of 2015 due to untested economic strategies. The Island nation enjoyed the lime light of the peace, after the conclusion of the Civil war which paralyzed our economic and the financial systems, Social values and right to survive.
The New beginning of economy kicked started somewhere 2010 after termination of armed conflict. This was a grim period of existence, where global economy in turmoil as Banking bubble devastating in USA and UK. The Impact of Mortgage driven lending factors and Wall Street Financial Bake House started burning with the aid of the quants of Wall Street. Fortunately, Sri Lankan financial purge stopped with Ceylinco Based Golden Key Company collapse and Managed with using tools of regulators ending the Bank Run. Sri Lanka was better financially managed despite staggering cost of war.
The Economic Recovery started, alongside with new Express and highway constructions, Internal road buildup, Massive port build up and up grading Internal marine resources. The Railway transport restoration begun with new extensions. A vision setup for a Promising economic growth, Values and social standings. Sri Lanka logically corrected the growth driven path after lapse of three to five years of recovery, as massive funding channeled to restore the destruction inherited over thirty years.
The world surprised to believe, how Sri Lankans made economic upheaval just over five years to 2015. Sadly, we are now experiencing an Economic melting. The Economic slowdown started from the first half of 2015. The collapse started breaching an International Agreement with China, the second largest economic power house in the world, grounding development of Port City Constructions and which led to seize all foreign investments till today at large. Since then we observe the bad omen of gradual depreciation of exchange rate from LKR 133 in 2015 to LKR 160 in June 2018.
The Twilight begins with the steep decline of local and Foreign Financial Assets belongs to our Economy as the all the Financial Institutions are heated of increasing delinquency Credit to 7% (Non-Performing advances) and financial stagnation. Financial Assets have diminishing faster in value, while Liabilities are growing at a speed without regulatory intervention.
According to the Annual Report of Central Bank of Sri Lanka, The State Debt Book expanded to LKR 10,300 bio in 2017, which is 77.6% against debt to GDP. It is reminded the financial data collected from Financial Institutions are based on secondary source on audited figures. These figures specially on Credit Risk and Financial assets values are not always absolute,
At the same time, The Auditor General of Sri Lanka declared, the Debt standing at Rs.10,702 billion or more than Rs.389 billion at 81% against GDP correcting Central Bank figure.
The rupee depreciation along a mammoth 196 Billion from January – June 2018, as stated by Mr. A Cabral, former Governor of Central Bank of Sri Lanka, according to Leading Island News Web site.
It is very strange that the State owned two Important Financial Audit Institutions giving two opinions on the same subject, indicates, our financial reporting discrepancies are beyond acceptance. If this is so, some Banks show, a mammoth Profit, but Asset value are behind the actual lending values. This was similar to Lehman Brothers, the fourth largest Investment Bank in USA, Broken in to Pieces, due to predatory Lending, Manipulation, large scale scams and subprime mortgages. The share value blown up outside of Wall Street to Cents Fifty.
The Outlook of Sri Lanka is deteriorating and remain negative due to slow growth and Poor Economic Performances. Dismal Operations Environment made it worst than expected revival. The Fitch Report (2007) says the real growth under 5% in 2007, expects to accelerate to 5.5% to 6% under review. But when large borrowing
taking place, Debt Service ratio fallen in to doldrums, as exchange income declines, Foreign Currency held account under taxation have dimmed the prospects to very uncertain limits.
It is the Banking Truth that growing credit is the oil of the engine, that Supports Economy. The Fitch further says, the credit growth reduced from 21.5% to 17.5% from just one year between 2015 to 2016. The Macro Consumption also reduced by 4% on top of tax increase beguile to the worse prepositions. Only unmanaged Construction Industry has grown alarming a Credit Risk, as per some Bank reports.
Natural Disasters, never ending political turmoil, no strategic development plan resulted the slowdown of Macro-Economic performance, recorded the poorest Growth since 2001 and the lowest for the 16 years to 3.1% in 2017. The report adding that the outlook of Sri Lankan Banks remains negative due to dismal Performance of Corporate Environment.
The Latest Banking International Supervisory Conditions imposed by The Bank for International Settlements (BIS) in Switzerland under BASEL ACCORD 111, Capitalization Programme, Most of the Sri Lanka Banks were to comply basic standards on Regulatory and Soundness Credentials. The Fitch Ratings repots, Seylan Bank, National Development Bank, DFCC, NDB, PABC maintaining market share under 5% on
Assets & Deposits. Only progressive Banks like Commercial Bank, Sampath Bank and Hatton National Bank contribute to 10% and the Bank of Ceylon and Peoples Bank owns 16%-20% of the banking economy. The Small Banks getting the cold as their Bad loans now rising at their chest level due to High Interest Cost, Delinquent Credit and rigidity in market expansion with the reduction of aggregate demand.
The Crisis and Solution
One of the main reason of the crisis is increasing treasury stock or Printing Money to a disastrous level made steep price increase in General goods and services. By 2015, printing money stood Rs.219 billon raised to Rs.320 billion in December 2016 as EconomyNext.com reported. The Sri Lankan Banks suffering from high fever of liquidity crisis like large scale State borrowing at State Banks to fund failed State Enterprises, declining demand for Ordinary credit, exhaust of refinance Schemes under State Sponsorship, frustration at Goods & Services Markets on demand & Supply, Overcrowded Banking at various Levels are some of them.
Besides Banking issues, the present Unstable Political Crisis with no Stable Leadership, Complexity in State Administration, no rule of law in important State Mechanism. It is Surprise to observe, the Established Rules and Laws in the Country are
now made to Negotiable to comfort to each other’s convenience and Politicians imposing as Judiciary manipulating the very unstable foundation in the Island.
It is quite difficult to regularize the Banking and Financial services making progressive and dynamics, unless we get rid of Quants, Con Political Actors and de regulators or so. The Recent massive fraud of Bonds buying at the Highest Financial Supervisory Controller is an example, as how the Wolves of Queen Street, devastated with an alien, imposed as the Head of Bankers to Bank of Sri Lanka. The broken down of EAP Fiasco is in small scale exposed, how Banking Supervision in the country is so weak, not so late from Golden Key Saga.
Therefore, at the conclusion, rule of law in Economic Macro Prudence is the basic model to be tested again in Sri Lanka, to avoid melted Banking Profile, nothing more and nothing less to restore Basic Practice of Banking