Where are we heading … is the question being asked by many people as Sri Lanka grapples with a number of issues from devaluation of the rupee, slump in tea and rubber prices, to a financial crisis.
In an email poll this week by The Sunday Times FT seeking responses to some key issues in the economy, most people said the Central Bank (CB) wasn’t handling the financial crisis as well as it should be. Analysts say the CB stepping in to ward off a crisis at Seylan Bank was a timely move but also noted that there were many ‘issues’ before at this bank which should have been nipped in the bud.
For example, the cost-to-income ratio has been over 70% when the sector average is 50% while the NPL (Non Performing Loans) is over 15% compared to around 10% average in the sector, according to analysts.
The CB says they are on top of the situation but most people don’t believe the regulator anymore, and more and more reports are trickling into newspapers of depositors withdrawing or seeking to withdraw in many cases, hard-earned money from various financial institutions – even from some of the safest banks.
There is indeed a crisis of confidence and the CB is not handling it well – otherwise there is no reason why depositors should be calling each other and the media and explaining their fears. “Do you think I should remove my money,” one investor said, calling this newspaper in desperation. Maybe the CB has a gameplan and has not explained it well.
Whatever it is, depositors are going around in circles wondering what to do. The need of the hour, apart from other issues, is for the CB to have a hotline where the public can seek clarification on these issues. People need to be assured .. and that’s not happening right now. No bank, finance company or financial services firm is going to tell its depositors the truth – if there is a crisis.
One cannot blame the CB for every collapse in the financial services markets, particularly institutions that are not registered with the banks. But, on the other hand, the regulator is responsible for financial stability and if a crash in unregistered companies trigger uncertainty in the financial markets, the CB is answerable.
Thus – like it or not – the CB has a serious task to ensure the markets are stable without panic setting in, which to some extent is happening right now. The drop in confidence in the markets needs some mending which only the regulatory authorities and the regulatory authorities alone can do.
The media is also caught between keeping the public fully informed of a crisis and at the same time not creating panic, leading to people pulling out funds and triggering a run in institutions. There is a huge responsibility on journalists to ensure panic doesn’t creep in and set off a collapse in the financial markets. On the flipside, we are also duty-bound to inform people about the real situation in the sector, however unpalatable it would be to the authorities or institutions concerned. Not an easy task.
If the CB needs more teeth to its regulations, then it must be provided that muscle.
The exchange rate is another issue that is exacerbating a situation where foreign reserves are drying up. Exporters are facing a major crisis as they are losing their competitiveness with other competitors like India and China depreciating their currencies to make exports cheaper.
While the financial-cum-economic crisis – here and abroad -- is expected to peter out in 12 to 18 months, unemployment levels are likely to rise with some companies downsizing and offering a VRS (Voluntary Retirement Scheme).
Also with restrictions and import controls coming in, are we heading back to the 1970s?