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Sri Lanka EXIM Bank could be another disaster

ECONOMYNEXT – Sri Lanka’s budget proposal to build an Export Import Bank to subsidise big business at the expense of the rest of society could be another state bank disaster, an economist warned.

"The proposal to set up an Exim Bank with state participation to cater to the international trading sector is another misconceived venture though it is going to be a public private partnership," top economist W A Wijewardene warned in Sri Lanka’s Daily FT newspaper.

"The Government has already burnt its fingers in the banking sector by getting the public funds to buy private banks and establishing two state banks on similar lines earlier.

"Instead of exiting the Government’s stake in leading private banks it is continuing with the same bad policy which has frightened the private sector."

Exim Banks typically give subsidized credit to foreign buyers of a good manufactured in the Exim Bank country, transferring wealth extracted from ordinary citizens to business and foreign consumers.

Typically the argument put forward by big business to set up an Exim bank is that ‘other countries are doing it, so we are at a disadvantage.’

Exim Banks typically finance foreign governments and some are involved in non-transparent deals.

Sri Lanka has already proposed to tax income of manufactures at 15 percent, which is the lowest after Ireland. Low income tax leave capital in the hands of investors to re-invest and create jobs.

High income tax on the other hand transfer investible capital from the most skilled entrepreneurial citizens into the hands of rulers who bust it up in current expenditure, mostly in salaries of state workers in the case of Sri Lanka.

However setting up Exim Banks and other subsidies to business, amounts to ‘negative taxation’, where money collected from ordinary people or other free enterprises competing without subsidies are given to companies.





Sri Lanka has a bad record in setting up and running state banks, which also make losses with bad loans, and a bailed out with public money.

Wijewardene said Sri Lanka set up two banks in recent years, which collapsed under the weight of bad loans. The SME Bank and Lanka Puthra Bank were set up after governance standards in People’s Bank and Bank of Ceylon were tightened under reforms made in late 1990s and early 2000s.

"Both these banks became bankrupt with undue political interferences which would have been the sole purpose of setting up them," Wijewardene said.

Lankaputhra Bank had loaned hundreds of millions to Mihin Air, another failed state venture. The two failed state banks were merged and capital injections given.

A budget for 2016 had proposed to merge Lankaputhra with the Regional Development Bank.

"This would amount to making even the presently well-performing RDB sick," Wijewardene warned."

The proposal for an Exim Bank comes as Sri Lanka has set penalty rates for exporters. (Colombo/Nov26/2015)

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