The Chairman of the People’s Bank discusses policy reforms, banking consolidation, digitalization of state revenue agencies to combat corruption, and the mindset shift needed to see painful reforms through.
Sujeewa Rajapakse, Chairman of People’s Bank, one of Sri Lanka’s largest banks, shares his views on the economic crisis, the long road ahead – paved with hard choices – towards resetting the economy, and crucial changes necessary to reposition Sri Lanka.
To revive the economy, a paradigm shift in attitudes and mindsets is critical, Rajapakse avers. The dire need for such a change is evident on our roads, where drivers often fail to adhere to traffic rules. Another crucial step is to modernize, streamline and digitalize state revenue agencies to eradicate corruption by limiting human intervention. Digitizing the entire process – at the tax department or Customs, for example – would make it more efficient, transparent and convenient for the taxpayers and reduce irrelevant discussions with officers. Rajapakse also suggests that the private sector should bring their foreign currency earnings to the country within a reasonable period, and the government should make the necessary reforms to SOEs and consolidate industries where applicable. “By taking these steps and embracing change, we can quickly revive the economy and create a more prosperous future for all Sri Lankans,” Rajapakse posits in this interview with Echelon, excerpts of which follow:
How do you frame the problem of the unfolding economic crisis and its causes?
In my view, this crisis is the result of human actions rather than any other factors. While maintaining a healthy balance of payments is crucial, there have been significant mishandling and fundamental problems that we have yet to address with a clear set of priorities. While infrastructure is essential for a country’s development, the question remains whether there has been an appropriate balance. Continuously borrowing large sums of money for long-term projects with short-term payments leads to an obvious mismatch that, in my opinion, is entirely human-made. As a result, the entire country is suffering, which could have been largely avoided.
Another significant issue is the lack of a strategic plan for the country, which should not be subject to political whim. A country requires a clear vision, independent of political parties. While political parties may have their agendas, the fundamentals should remain unchanged. For instance, one administration may make the service sector the primary driver of the economy, while the next may take a full ‘U-turn’ and declare exclusive support for manufacturing or agriculture, resulting in the previous administration’s heavily-funded projects coming to a halt.
While we may have learned valuable lessons from this crisis, there is still much work to be done. In particular, I hope that administrators and politicians recognize the importance of having a clear vision and strategic plan for the nation. In my opinion, the absence of such a plan is the root cause of the current crisis.
Although it is the general public that elects the government and its members, we must still scrutinize and determine whether a credible manifesto exists and whether those in power are capable of presenting one. This is crucial. As a result, we must exercise extreme caution and mindfulness when making judgments, as we will ultimately lead our nation. The International Monetary Fund (IMF) is present in every corner of the globe, and we must be aware of its scrutiny. However, I was pleased to learn from the Commissioner General of Inland Revenue that IMF staff are examining our projections and determining whether we are achieving them. It is also critical that they discuss corruption and malpractices with officials.
While state-owned enterprises (SOEs) are responsible for some of the issues, the private sector also plays a significant role. This is a critical structural reform that must be undertaken. While we are pleased to hear that the cabinet will privatize at least nine institutions, there are still others that require attention. Structural changes cannot be made overnight, but tax adjustments can be made immediately. We must take a keen interest in ensuring that those elected have the dedication and courage to make the necessary changes, as structural reforms will have the greatest impact on the nation.
What should we prioritize in a road map to reset the economy?
Despite being overwhelmed by the IMF’s $2.9 billion loan, we must appreciate their favourable treatment of us. While some nations struggle due to an inability to present a convincing strategy, our administration dared to introduce changes and other measures. However, there is no question that government revenue must be increased. Consider the global scenario: the average tax-to-GDP ratio is 20%, while ours is the lowest at around 6.5%. Therefore, the government must increase tax revenue.
One proposal suggests that adjustments to the PAYE tax could increase government revenue by around Rs100 billion, while several SOEs have suffered losses totalling a staggering Rs600 billion in six months and need immediate attention. Reforms must be made to SOEs, as taxpayers’ money is used for them. These reforms should be taken courageously, and I believe they are in the pipeline and will be executed by the government.
Digitizing the entire process is also essential. The IRD has invested over Rs10 billion to implement its RAMIS system, but they are yet to make full use of it. There are numerous problems, and every time we need to make adjustments to the system, we must pay large sums of money to the developer. My request to the government is to minimize human intervention in government revenue agencies to avoid irrelevant discussions with officers. Taxpayers should be able to upload their tax returns and receive email queries as they do in other countries. My dream is to see not just one institution but the entire state sector go digital.
Consolidation is crucial in various industries. For example, in banking, a large number of banks could be reduced through mergers. Similarly, in the coconut industry, the coconut cultivation board, coconut development board, and others that serve the same purpose should be consolidated, reducing their numbers and managing the organization. Consolidation should be applied everywhere.
Although we do not focus on reforms for the private sector, their perspective is crucial. For instance, we are all citizens of this country, and most of us have received education virtually free of charge. Also, large businesses approved by the BOI enjoyed 20-year tax holidays, duty-free imports of capital goods, and even a land grant. Although subsidies like these are necessary for some, the mentality that subsidies are an entitlement must be eradicated from society. Export-oriented businesses and entrepreneurs should bring their foreign currency earnings to the country within a reasonable period. The Central Bank needs to develop a system for this as in other countries, and intermediaries between the exporter and final consumer must be investigated.
The private sector bears an equal share of responsibility, as the government is said to lose trillions of rupees in revenue due to malpractices. A significant paradigm shift in thinking, acting, and maintaining discipline is required. We must be more patriotic to stop our young people from leaving this beautiful country.
A paradigm shift in attitudes and mindsets is critical for reviving and stabilizing the economy, and this must start with the education system. Even kindergarteners should be taught the fundamentals of our country’s values, with a focus on imparting values and knowledge that are essential for success in life. In Japan, for instance, values are prioritized in education up to the fourth or fifth standard.
The dire need for such a change is evident on our roads, where drivers are often careless, inconsiderate and fail to adhere to traffic rules. This issue demands a top-down approach to be effectively tackled.
How are the recent policy corrections impacting the banking sector, and what are the immediate factors shaping the future of the industry?
In my view, the most crucial factor is capital adequacy. Due to the sizable volume of loans and loan portfolios, as well as the decline in some loans, non-performing loans (NPLs) are on the rise. Fortunately, People’s Bank boasts of comfortable capital adequacy in the industry at approximately 16%, and we aim to maintain this. However, it will prove very challenging going forward, given the likely significant discounts on international sovereign bonds and other bonds, a result of which some banks may face difficulties. This will be our number one challenge.
Number two on the list is digital platforms. Every bank must allocate a substantial amount of capital expenditure to ensure a continuous improvement of these platforms, which is essential for providing customers with a seamless experience. With infrastructure eventually becoming obsolete, digitalization will help to deter customers from visiting physical bank branches.
That being said, the most challenging aspect of the current environment is the high interest rates. Interest rates must be lowered to below 10%, or else small and medium-sized enterprises (SMEs) and micro, small, and medium-sized enterprises (MSMEs) will face severe difficulties. Nonetheless, there is another critical factor to consider: having adequate foreign reserves. Banks must possess these as, at some point, the government may view the lifting of some import barriers positively. This will create a significant demand for foreign reserves, and bankers must have enough funding sources. Presently, I believe that the IMF deal will improve the country’s rating, providing all banks with the opportunity to access the global market once more and continue business with foreign banks.
What do you anticipate will happen to local debt in the sovereign debt restructuring process, and will banks be affected?
Based on my understanding, most banks have accounted for the sovereign debt at deeply discounted prices, ranging between 30% to 40%. As such, evaluating the impact on the banking sector is crucial. Fortunately, the government has engaged independent consultants for credit evaluations and assessments, focusing on the five largest banks. While this is a positive step, the People’s Bank has independently taken conservative measures and necessary precautions. Nevertheless, it would be better to include all banks in the evaluation process. If there are significant discrepancies, which will have an impact on Capital Adequacy, then the regulator should consider giving those banks a few years to breathe before demanding significant provisions.
While the People’s Bank has only one shareholder, the Treasury or Ministry of Finance, it has other stakeholders to consider. With several trillion rupees in deposits and significant quantities of loans and financial instruments, any changes will impact our capital adequacy, which is crucial. However, we are confident that we won’t face significant problems, even if the IMF advises the government to take precautionary action.
But in the event of significant issues, we are confident the Central Bank would intervene with an appropriate strategy. Banks will then need to commit, and I believe that mergers and acquisitions may play a significant role. As one of the largest banks in the country, we are also considering various strategic options to have inorganic growth in the bank.
What is your approach to leadership of the bank during these challenging times?
My appointment with the state-owned bank was on January 5th, 2020, and just two months later, the Covid pandemic hit. Since then, it has been a constant battle to remain liquid as we financed numerous facilities for state-owned enterprises in energy, petroleum, water and pharmaceuticals etc. Our primary objective as the “Pride of the Nation” was to serve the country’s interests. Although maintaining capital adequacy and reserves is crucial, our primary goal has never solely focused on profits. We paid the government about Rs20 billion in taxes and dividends last year. We also supplied around Rs700 billion worth of foreign currency to SOEs like the CPC, ensuring their comfort during a challenging time.
Effective human resource management is of paramount importance to us. Our workforce of just over 7,500 personnel is our most valuable asset, yet one that goes unrecorded in our balance sheet. If we were to assign a value to this asset, I believe our current balance sheet of Rs3 trillion could rise to Rs4 trillion, with the additional Rs1 trillion representing the worth of our staff.
This is how I consider the value of human capital. Our employees drive the bank, positively impacting the lives of our customers and the economy, so we are always working hard to engage and motivate our employees to think of the big picture. The country is currently facing a challenging time, and everyone will have to endure hardships without a doubt. However, we must maintain a cheerful attitude and remain optimistic for the sake of our country, not for the benefit of the administration or anyone else.
How is People’s Bank making a difference to its customers and the people of this country?
With a customer base of over 14.5 million and 18 million accounts, People’s Bank serves a significant portion of Sri Lanka’s 22.5 million population. Despite its size, the bank remains committed to providing excellent customer service, which remains its top priority.
Customers are encouraged to share their concerns, particularly those who have taken out loans with us. Our unique perspective allows us to address their issues with greater depth and resources than traditional banks, in keeping with the mandate the bank has held since its establishment in 1961 to support people living in impoverished areas.
As deposit growth primarily originates from these regions, we focus on serving the cooperative sector and micro, small, and medium enterprises while ensuring that our shareholders receive a reasonable share. We will continue to meet the needs of our customers and customers and stakeholders as we work towards achieving our objective.