We Have Not Seen Any Adverse Impact On Real Economic Growth – Ajith Nivard Cabraal

Following are excerpts of the interview:

By Faraz Shauketaly

Q: The oil price globally has seen a significant decline, what impacts will this have to Sri Lanka?

A: Oil has been a very volatile commodity and we have seen wide fluctuations in prices over the last several years. The oil prices react sharply to global conditions and shocks, and therefore it is very difficult to predict its movements.  In recent times, we have seen some moderation in oil prices, for those reduction may be of a temporary nature, and therefore we should not be too euphoric about such decline because one never knows as to how long such reductions may last.

The CPC has already granted a reduction in their selling prices to the customers, but we all have to understand that CPC has accumulated losses for a long period of time in the past by selling below cost, and such losses have been financed by bank borrowings.  In that background, it is vital that the CPC is gently nursed back to good financial health and therefore a reasonable level of profit needs to be enjoyed by the CPC for a reasonable period, in order to allow the CPC to settle its loans, and to ensure its viability.

If that is done, the significant interest burden carried by the CPC could be eased, and that would enable the CPC to undertake a much needed capacity building exercise with its own resources. The current global conditions would provide a useful opportunity to the CPC to recover, and I believe they should make use of that opportunity in order that they become an institution that could play an extremely useful role in the economy of our country.

 

Q: Even though the CB has focussed on a low interest rate regime, credit growth has not picked up. What do you attribute this to?

A: From the monetary policy point of view what is most important is overall monetary expansion measured in terms of growth in money supply (M2b).  M2b has been growing at a pace of around 12 per cent so far this year. This growth is broadly consistent with overall real economic growth around 8 per cent and average inflation of around 4 per cent.

Therefore, we have not seen any adverse impact on real economic growth due to lower than expected growth in private sector credit which is only one component of the overall monetary expansion.

The lower growth in private sector credit in the past 12 months has been compensated through higher growth in monetary expansion.  Such expansion has occurred as a result of higher growth in external inflows, namely foreign exchange capital inflows to the private sector, and government as well as higher export of goods and services and remittances.

Going forward, due to the current low interest rates environment, we already see the signs of domestic private sector credit growth picking up, and hence we will see more balanced contribution from both local and foreign sources in monetary expansion in the coming months in order to finance the envisaged higher economic growth.

Q: Governor, your predictions and wish list for 2015, with special focus on interest rates, etc?

A: We are now preparing ourselves to deliver on the tough targets that we have set for ourselves for 2020. In that journey, 2015 would be the first milestone, for which year we have set intermediate targets that will take us to the overall position as planned for 2020. In that regard, I would like to set out our targets which you might consider as my ‘wish list’.

Poverty:  Less than 1%

Unemployment:  Less than 3%

Acute Malnutrition amongst children under 5 years: Less than 3%

Electricity coverage: 100%

Literacy: 100%

Computer Literacy: 90%

Life Expectancy: Above 80 yrs. for both gender

New Highways: Additional 311 kms

Mono rails: To be initiated in 2015

Entire road network: All weather roads with 100% rural accessibility

Public investment: 8% of GDP

National Savings/ Investment Gap: 0.5% of GDP

Stock Market Capitalization: US$ 100 billion

Corporate bond market: US$ 100 billion

Bank assets: Rs 18 trillion

 

Q: The finance company consolidation process appears to be meeting the time lines set by the CB. How many companies have complied so far and how many are pending, can it be completed as planned in 2014?

A: The Central Bank, as announced in the Master Plan on Financial Sector Consolidation, is progressing well.

At present, there are 41 Non-bank Financial Institutions (NBFIs) and 9 banks who have confirmed their consolidation plans. Out of this, 8 NBFIs and 2 banks have already completed their respective consolidation plans, whilst 33 NBFIs and 7 banks are still progressing and are in different stages of their plans. The Central Bank is closely following up on the consolidation process to complete as planned in 2014.

 

Q: Can the CB meet its stated target of only having 20 finance companies at the end of the consolidation process?

A: It is very likely that CBSL will be able to meet its targets in principle although the exact number may be slightly higher. There would be a few finance companies which are owned substantially by certain banks and controlled by them although such finance companies may continue to use their earlier names for some time.

Nevertheless, from our side, those institutions would be considered as finance companies that have been consolidated, because those would essentially be owned by the respective banking institutions.

 

Q: Even though groups owning two or more finance companies were asked to merge that does not appear to be happening, specifcially Vallibel group controls two separate entities and LOLC has two large entities. Have they been granted exemptions?

A: In certain instances, we have given exemptions based upon the overall needs of the economy and to develop the health of the entire sector.

We also have been taking into consideration the capacity of certain business groups, as well as the governance status available in certain groups, which presents additional advantages.

We have also given consideration towards ensuring that the micro finance sector is fully supported, since that is one of the major functions we expect to be delivered by the non-bank financial institutions of our country. In that background, we have made certain exemptions in order to ensure financial inclusivity as well as to create a robust financial sector.

 

Q: The DFCC-NDB merger, can you elaborate on the motive and benefits in such a merger. Will the merged entity focus on development banking or focus more on retail activity?

A: When Sri Lanka progresses towards a US$ 150 billion economy by 2020 with mega infrastructure development projects, we would want to see the Sri Lankan development banks having the strength and the capacity to be able to play a sustainable role in the new economic model. In order to make that happen, a strong, well-capitalized development bank is needed. Such a bank should also be able to access large capital funds from outside as well as be able to undertake the financing of major national level projects.

In this background, the scale of operations is important, and therefore the merger of the two existing development banks with a single large unit would provide a superb opportunity for this new and important role to be played.

The new large scale development bank would essentially focus on development banking, whilst also providing retail banking services so that their clients could be serviced in an integrated manner.