Chandra J on global financial crisis and its impact on Sri Lanka

Though greatly relieved and pleased to read in the Sri Lankan media several public statements and media releases from the leadership team of the Central Bank, assuring business and civil society that there are no significant issues impacting on the economy, business and civil society as a + of the recent global economic and financial crisis, former Ceylon Chamber Chairman Chandra Jayaratne has listed some issues potentially impacting Sri Lanka.

He noted that recent statements have highlighted that the positive, prudent and timely action taken by the Central Bank of Sri Lanka and the Monetary Board which have effectively mitigated any residual risks that the Sri Lankan economy, business, financial services sector and civil society may have been exposed to as a consequence of the recent global crisis.Whilst congratulating the leaders and key officials of Government, Policy Makers and Central Bank for their positive, prudent and timely action, Chandra has requested the Ceylon Chamber of Commerce to consider setting up a round table in Sri Lanka, composed of eminent personalities in government, policy making and regulatory bodies, international financial institutions, business, professions and academia to review, draw out lessons,  identify potential consequential impact on the Sri Lankan economy, business, financial services sector and civil society and to develop necessary recommendations and risk mitigation plans for implementation where appropriate.This is on the basis that over the past one month overseas Chandra had benefitted from wide media exposure on the possible reasons/regulatory failures and governance issues likely to have lead to the crisis, as well as analyses/debates/predictions of the future, critique on accountability and an exchange of ideas and recommendations of eminent persons on remedial measures in the short and medium term to be adopted globally. In correspondence to Central Bank he has urged to review the potential issues and areas identified and provide the Chief Economist of the Ceylon Chamber of Commerce with responses to the specific issues, which is listed below.

Issues Potentially Impacting on the Economy, Business and Civil Society
1. Has the Central Bank in making its recent pronouncements researched the potential economic and social implications under different scenarios with varying assumptions (both global and local economic variables being imputed) based on optimistic, middle ground and pessimistic situations?2. Has the Central Bank assured in the process of its reviews that all required risk mitigation steps have been duly exercised by the Government, Policy Makers, Regulators, the Private and State Sector key players, including those engaged in Banking, Finance and Export sectors?3. Have the Central Bank reviews confirmed that it is most unlikely that an economic/banking /financial crisis will crystallize in Sri Lanka in the short to medium term consequent to the current global crisis? Therefore no additional risk mitigation measures other than those already announced are necessary, including the preparation of a contingency plan to apply for IMF or other Agencies for emergency assistance?4. Has the Central Bank reviewed, whether as a consequence of the current global crisis or potential consequential crisis in the Banking and Financial Services Industry in Sri Lanka, there will become necessary to have in place a well researched, justified and equity assured fiscal stimulus plan and also whether it is best that as a contingency measure such a plan be prepared at this stage?5. Has the Central Bank reviewed, whether in the context of the current global crisis, lessons learned from the crisis or a potential consequential crisis in the Banking and Financial Services Industry in Sri Lanka, there are some critical change management, fiscal management and regulatory changes related policy issues that are best identified and introduced as a part of the 2009 Budget to be announced in November 2008?6. Has the Central Bank reviewed as a consequence of the current global crisis or potential consequential crisis in the Banking and Financial Services Industry in Sri Lanka, whether the level of credit available to the business sector (including exporters/ industrialists/importers/plantations sector/services sector and small and medium businesses) following tighter lending policies of Commercial Banks, will not negatively impact business/economy and growth? Has the Central Bank in consultation with the stakeholders developed necessary risk mitigation contingency plans if such an eventuality were to arise? Are the present policies, terms and facilities governing/ available for borrowings by Banks from the Central Bank in a liquidity crisis adequate and can meet the future needs in the short to medium term as businesses in Sri Lanka and banks get impacted by the effects of a global recession, and lower consumer spends in export markets?7. Has the Central Bank evaluated the potential impact on the Sri Lankan economy in the short to medium term, including the potential impact on exporters (eg. Tea, Rubber, Apparel, Gems and Jewelry etc)and tourism /foreign employment, persons employed in and providing goods/services to export undertakings, as a consequence of the potentially reduced growth/consumer spends in key markets, including the impact of recessions, job losses, and tighter credit in those markets?8. Has the potential of 7 above been considered in the light of potential loss of trade and export concessions granted to Sri Lanka including GSP+?9.  Has the potential of 8 above been considered in the light of any subsidy/assistance/stimulus package  granted by Government to affected industries/exporters and producers being treated as inconsistent with the commitments under WTO and hence exposed to penal consequences?10. Has the potential impact of 7 above ( i.e. A loss in GSP+ concession) in the medium term, especially beyond the initial government assistance period, been considered in Central Bank reviews?11. Has the Central Bank initiated subsidy/assistance package of the Government been considered from a macro perspective, looking at boththe formal and informal sector operations, as well as primary producers and suppliers of goods and services to exporters, small and medium sector and self employed persons likely to be impacted?12.  Has the Central Bank reviewed and determined that the exchange rate policy and management regime in place at present are consistent with growth and development objectives of Sri Lankan business when operating within a high level inflationary scenario,(which scenario prevailed over the last twelve months) and now having to operate within the additional severe external challenges/stress consequent to the global crisis?13. Has the Central Bank reviewed and determined that the interest rate policy, fiscal management and government debt subscription/management regimes in place at present are consistent with growth and development objectives of Sri Lanka and its business sector now exposed to operating within severe external challenges/stress consequent to the global crisis?14. Have the Central Bank reviews taken cognizance of possible lower than usual/anticipated foreign aid and grants from key donor countries and institutions in the short to medium term?15. Have the Central Bank reviews taken cognizance in the short to medium term of possible lower than usual/anticipated subscriptions for commercial borrowings/loan facilities floated by the government including government bonds subscribed for by Sri Lankans resident overseas in search of interest arbitrage?

16. Have the Central Bank reviews taken cognizance of possible lower than usual/anticipated foreign direct investments and lower investments in capital assets and business expansion by local businesses, in the short to medium term?17. Have the Central Bank reviews taken cognizance of the potential risks of lower exports and costly imports further expanding the negative trade balance and the resultant balance of payment issues and potentially lower forex reserves forcing a the Sri Lankan Rupee (believed by some to be already overvalued) to be significantly depreciated in the short to medium term?18. Has the Central Bank review taken cognizance of the potential fiscal strain as result of lower tax revenue exacerbated by unplanned spends on the package of assistance/grants, war related enhanced spends and other unplanned significant spends this year to date?19. Has the Central Bank assessed the potential lower capital spends by the Government this year on infrastructure development and human capital development and the potential impact thereof on productivity, competitiveness and growth in the short to medium term?20. In the light of the recent movements in international oil prices has the Central Bank reviewed the lessons arising from Sri Lanka Hedging under contracts its oil import programme, and assessed especially whether the terms of contract were effectively risk managed, with required stop loss provisions at both ends of the variable?21. Has the Central Bank along with its key stakeholders in business, banking and financial sectors and Accounting/Auditing Professionals reviewed whether any changes to and any additional prudent regulations and guidelines connected with Accounting and Auditing Standards will become necessary, drawing lessons from the recent crisis?

Issues Potentially Impacting on the Banking Sector and its Key Stakeholders

1. Have the Regulations governing Banking and Financial Institutions in Sri Lanka (including Development Banks, Investment Banks, Fund Managers, Pension/Provident Funds, Share Brokers, Money Traders, Forex Traders, Finance Companies, Savings Institutions, Insurance, Leasing and Hire Purchase, etc) kept up with changes in laws, systems and procedures, operating environments, and recent case studies of failures in Sri Lanka and overseas?2. Are all the Institutions (including those who are not directly regulated by the Central Bank) who are key players in the financial services sector , operating within an environment that assures their continuing stability, within a going concern status and without likely failures in the short to medium term? Are there any lessons from the recent global financial crisis that raises any amber lights om the need for urgent new laws, regulations, risk management practices and operating systems and procedures in these institutions?3. Have the initiatives, reviews and suggestions made/agreed to by the Financial Sector Reforms Committee of the Central Bank been followed up/implemented?4. Has the Central Bank assured that none of the Commercial Banks operating in Sri Lanka nor any of the leading Exporters have in their offshore or forex investment holdings, any financial instruments that have significantly lost market value recently or have exposures in foreign Banking and Financial Institutions that are already impacted or likely to be impacted in the short to medium term?5. Has the Central Bank along with its key stakeholders in banking and financial sector reviewed whether any additional prudent regulations and guidelines connected with Securitization will become necessary in Sri Lanka, drawing lessons from the recent crisis, whilst assuring in the process that financial innovation is not blocked as a consequence?6. Has the Central Bank reviewed whether the sector/business exposures of Commercial Banks and other Financial Services sector players will not negatively impact them due to bad debts and loan loss provisions in the short to medium term, arising from the non realization of future export orders discounted for banking facilities, lower margins of exporters and lower than anticipated export volumes?7. Has the Central Bank reviewed whether the exposures of Commercial Banks, Finance Companies and other key financial sector players to fixed capital (including land and buildings) investments in shares and subsidiaries, bills discounted and non performing loans / advances are prudent and within acceptable levels, even if these institutions are exposed to external shocks and stresses of the type experienced by global financial services players recently?