Sri Lanka President asks banks to give subsidized credit to identified sectors

ECONOMYNEXT – Sri Lanka’s President Gotabaya Rajapaksa has asked banks to give concessionary credit to identified sectors, his office said shortly after the country slapped import controls as the rupee came under pressure from money printing.

“It is not possible to continue with the easy practice of earning profits by providing loans to import vehicles and plastic products etc,” President Rajapaksa was quoted as saying to bank representatives.

“More loans should be directed to newly identified priorities. Otherwise, both consumers and entrepreneurs will suffer.

“When farmers obtain loans at higher rates from the private sources they and their harvest easily become victims of exploitation. It is not healthy at all. Banks should assist not only large scale businessmen but also farmers.”

The sectors that needed funds included plantation industry including tea cultivation, small and medium scale industrial production, housing and other constructions, agri-based products, value added cinnamon and pepper.are some of them.

“President requested the banking community to provide loans at concessionary rates for these sectors,” the statement asaid.

President Rajapaksa had called for a “regular review should be conducted to monitor how loans are been utilized.”

Sri Lanka had brought Coronavirus under control but many sectors had collapsed. Sri Lanka’s health sector and the military has aggressively contact traced and is ahead of many countries in the world.

‘The government was able to keep the corona virus under control,” President Rajapaksa said.

“The biggest challenge we face right now is to rebuild the collapsed economy. It will take a long time for the apparel industry to recover. The tourism industry also has suffered a serious setback.

“A very large amount of revenue and jobs have been lost. The old economic model based largely on imports is no longer viable.

“We must move towards a production economy. The banking sector can make a huge contribution to make this a success.”

Representatives of banks who had met the president had discussed problems faced by the banking industry and agreed to discuss with the Central Bank and find solutions for them, the statement said.

Stimulus

Classical economists have pointed out that Sri Lanka has a merchandise trade deficit due to government budget deficits financed by foreign loans and also a surplus in the services account coming from remittances (exports of labour) and information technology exports as well as tourism.

If deficits or bank credit is financed by printed money, in addition to a trade deficit the currency will also fall.

Sri Lanka started to suffer ‘foreign exchange shortages’ after a money printing soft-pegged regime was set up in 1951. Countries like Singapore which have strong currencies however have avoided deficit budgeting and money printing (central bank credit) by avoiding the post World War II Western fad of Keynesian stimulus.

Bad loans in Sri Lanka’s banks have risen after the currency collapsed in 2018 following a ‘monetary stimulus’ in the form of liquidity injections and rate cuts in March/April and July/August 2018.

A fiscal stimulus followed in January 2020.

Classical economists have pointed out that a Keynesian ‘stimulus’ financed by printed money will lead to trade and balance of payments deficits, and currency collapsed, unless the economy is closed.

“A Keynesian stimulus will lead eventually to balance of payments deficits if government do not exercise restraint in time,” Singapore’s former finance minister Goh Keng Swee said over 20 years ago explaining the reasons for not setting up a money printing central bank after independence from Britain.

“A part of the increased incomes people receive will be spent on imports and when exports do not increase in proportion a trade deficit will occur.”

“In the immediate post-war years, Keynesian economics won widespread acceptance in both academic and government circles in Britain and the United States.

“Confidence increased in the ability of governments to maintain full employment and stable economic growth through Central Bank credit policies and government fiscal (budgetary) polices.

Keynesian Consequences

Goh said by the late 1960 balance of payments problem had started to occurre in both the UK and US. UK was hit by Sterling crises from 1967, as the US dollar collapsed against gold in 1971-73 the Bretton Woods system was also destroyed.

“My Cabinet colleagues took careful note of these dramatic events as they unfolded on the world’s financial scene,” Finance Minister Goh said.

“None of us believed that Keynesian economic policies could serve as Singapore’s guide to economic well-being.

“Our economy was and is both small and open. Financing budget deficits through Central Bank credit creation appeared to us as an invitation to disaster.

“There was no effective way of exchange control in an open trading economy like ours to deal with the inevitable balance of payments troubles.”

As Singapore went out of Bretton Woods its currency appreciated in the 1970s.

On January 01, 1971 the Singapore dollar went up from 3.05 to the US dollar to 2.81 as the Bretton Woods started to collapse.

After the so-called Smithsonian agreement failed ending the Bretton Woods for good in 1973, the Singapore dollar appreciated from 2.81 to 2.45 to the US dollar.

Sri Lanka’s rupee fell from 4.86 to 5.97 amid the Sterling crisis in 1967. An import control law was brought in 1969.

On January 01, 1973 the Sri Lanka rupee fell from 5.97 to 6.4 to the US dollar, as the Singapore dollar appreciated despite import dependency and free trade,

On January 02, the rupee fell to 6.7 to the US dollar.

In the 1970s Sri Lanka closed the economy for imports, driving up unemployment and poverty.

The Sri Lanka rupee is now around 188 to the US dollar,

The Singapore dollar, produced by the Monetary Authority of Singapore based on currency board principles and classical economics is now 1.4 to the US dollar, despite the country’s heavy import dependency.

“When nearly two-thirds of our citizens’ expenditure is spent on imported goods, a strong Singapore Dollar helps to keep consumer prices down,” Finance Minister Goh said. (Colombo/May15/2020)