• Country has failed miserably on policy consistency
• Tourism is easily a $ 10 b revenue opportunity
• Important to think beyond the traditional exports
• Land reforms and investor protection are critical
• Not doing a good job activating the India corridor
• SL always had strategies but failed on execution
• Digitising entire economy a critical requirement

Standard Chartered Bank (SCB) CEO Bingumal Thewarathanthri commended the Government’s approach on getting Sri Lanka’s economy back on track in an interview with The Sunday Morning, asserting that the economy had made significant progress compared to where it was one year ago, with the key challenge now being debt restructuring.

“There is a Domestic Debt Optimisation (DDO) and there will be an external debt restructuring as well. Getting all that aligned to a proper formula, getting everybody’s buy-in, and getting debt relief of $ 17 billion from the debt pile of slightly over $ 80 billion will be crucial for Sri Lanka, because there are multiple partners to negotiate with – it’s not an easy process,” he noted.

In the course of the interview, Thewarathanthri also spoke on the importance of policy consistency, good governance, and transparency, State-Owned Enterprise (SOE) and labour reforms, the outlook for the banking sector, industries to bank on as Sri Lanka focuses on recovery, and priority areas for Budget 2024.

How do you view the state of Sri Lanka’s economy at present and what are the key challenges you see for Sri Lanka in the months ahead?

When we look at Sri Lanka’s economy, we have to compare it with June and July of last year. From that time to now, I think we have made significant progress. We also have to compare with some of the other markets that have gone through or are going through debt restructuring, like Zambia or Ghana. Zambia of course had a win in the last couple of days, when it got a deal on the debt restructuring but it took time. Ghana did the Domestic Debt Restructuring (DDR) and it took some time for it to get the formula and all the participation. 

From that perspective, in Sri Lanka in the last year, from the debt suspension, going to the IMF in September, getting the EFF and board approval by March, and now discussing the DDO, prices have come down and we clearly see inflation settling to single-digit level in Q2. 

The reserves have gone up to $ 3.5 billion. The external sector is performing reasonably well because worker remittances have gone up to $ 580 million level. Tourism is also continuing with 60,000-70,000 tourists. In the off-season numbers have come down but still it’s promising – tourism revenue is between $ 140-170 million. Our Balance of Payments cap is something like $ 400-500 million. We are in a comfortable position in the external sector.

On the domestic side of course we are still trying to increase our revenue so there are challenges, but comparatively I would say Sri Lanka is in a much better position considering where we are after a debt suspension.

In terms of key challenges, the biggest challenge is crossing the debt restructuring. Now we know there is a DDO being announced and there will be an external debt restructuring as well, so you have to work with the bilaterals, multilaterals, and ISB holders. Getting all that aligned to a proper formula, getting everybody’s buy-in, and getting debt relief of $ 17 billion from the debt pile of slightly over $ 80 billion will be crucial for Sri Lanka, because there are multiple partners to negotiate with – it’s not an easy process.

The second challenge is on SOE reforms. We did very well in the last couple of months – getting into cost-reflective pricing, which we have never done, so now people are paying the actual price of a particular commodity. Reforming SOEs will be critical for the country to get the maximum output from some of them and for the people to benefit. Having political stability for the reforms will be critical. That’s another big challenge we see. Whether we have the political will to do some of these reforms will be a critical factor. 

The other is revenue. Revenue targets are very optimistic. We are looking at Rs. 3.2 trillion worth of revenue this year. That’s very optimistic. A primary surplus of 2.3% by 2025 – the IMF target – will be extremely difficult for Sri Lanka to reach with the current taxpayer base. Those are some of the challenges we see in the short term.

In light of the developments over the last few days, how do you view the Government’s approach to DDR?

We congratulate the Ministry of Finance and the Central Bank of Sri Lanka for achieving this critical milestone. This is an important step in the overall debt restructuring process. If we get all the required parties aligned, we can now aim to cross the entire debt restructuring process by September/October of this year.

By looking at the interest burden and for Gross Financing Needs to be at 13% by 2027, DDO was essential. We have achieved a fair amount of debt relief targets through the DDO process. However, there still is a significant pressure on interest cost. Therefore, the Government will have to aggressively drive revenue collection to a reasonable level to sustain the economy. If not, Sri Lanka will have inadequate funds for development needs and that might hamper growth in the medium term.

There has been criticism that equal treatment has not been applied across the board and that banks are getting a better deal out of the DDO exercise. Your thoughts?

Banks hold over Rs. 4 trillion of the entire Treasury bond portfolio of Rs. 9 trillion. Some of these funds were deployed in T-bonds for liquidity management purposes by banks. In a re-profiling scenario, banks have to take a massive day one loss that could lead to a capital erosion and put the entire banking system under pressure. Banks are also paying close to 50% as tax with a rising Non-Performing Loan (NPL) ratio of 13.2%. Any more stress would have put the entire economy in danger.

Since banks are now excluded from the DDO, they will focus on lending very aggressively and revive the economy. Banks will also have some leeway to write off some bad book interest and move forward with restructuring work. We also believe that the interest rates will come down in a couple of months to mid-teens. As always, banks will play a significant role in the economic revival process and keeping the capital at a healthy level was a good call.

What is your outlook for the banking sector in the months ahead and what is the approach you recommend as Sri Lanka sets its sights on recovery?

The banking sector has performed reasonably well. The sector has been going through stress from 2019, since the Easter attacks. There was a moratorium following the attacks, then there was Covid and another moratorium. The banks have performed reasonably well in those couple of years. Of course, now the sector’s profitability has come down by about 13%, which is not very healthy. Sector return on equity is about 8.9%, which is not very good. 

Having said that, in terms of sector capital adequacy, capital is hovering around 15% as an average and is well liquid because we are not lending a lot these days. Of course we had other challenges with people migrating, etc., but overall the banking sector is absolutely stable. Our liquidity coverage ratios are close to 200%. There’s enough liquidity, there’s enough capital, and the systems are absolutely stable to participate in the recovery process.

In this backdrop, how is SCB positioning itself and what areas is it prioritising?

We are a multinational bank and we have been here for more than 130 years. We are an emerging market bank and our roots are in these markets. We have a lot of deep local knowledge with a global outlook. 

Overall if I look at the last couple of years, we have done very well in terms of supporting essential imports, like food, pharma, and energy, and supporting the exporters and the airlines – we are the largest airline bank. We are also the largest financial institutions bank – the banker to bankers. We work with all the local banks confirming their letters of credit, doing their clearing, etc. and we have a significant market in that space. 

Firstly, we want to participate better in the financial institutions segment, which has not really used the bank lines in the last couple of years because trade has come down. We want to see trade picking up and participating better in the segment. 

The multinationals were anyway close to us because we had parental support from some of them, so we’ve done really well with those segments. But we really want to support the typical local industries, local production for local communities. We do well on exports but we are also looking at domestic manufacturing for the local community, where I think we have a role to play. We also have a small SME book and will participate in that as well.

In the retail segment, we will activate our personal loans and mortgage loans. We have enough liquidity and capital and the team is in place so it’s just a matter of activating the system and participating better in the market.

As Sri Lanka focuses on recovery, which industries would you bank on and why? What would you recommend in your personal capacity?

I think tourism will be a very important segment. I don’t think we have tapped even one-tenth of the potential. Thailand used to get close to 40 million tourists before the pandemic when we were getting about two million. We only got $ 4 billion worth of tourism income before the pandemic. This is easily a $ 10 billion revenue opportunity. As a country we should align to tourism, there is no doubt about it.

There’s a huge opportunity for the sustainable finance space in Sri Lanka. According to our research, we have a $ 16 billion opportunity in terms of attracting funds and investors into sustainable finance. Renewable energy is one big component where there’s huge potential in the Mannar Basin for wind power. Now we are short of about 500-1,000 MW but we can generate about 20,000 MW in Mannar – that’s the kind of potential we have. Of course we have to have grid connectivity to India because we have to export that energy.

Some of those new economies are critical for Sri Lanka. We can’t bank on tea and other traditional exports. Of course apparel is playing a significant role in Sri Lanka and so is tea and then there are spices and other commodities. Rubber is a very important segment. However, I think we have to think beyond that. It’s very important that we think beyond that.

The construction sector has suffered the most and is down by 40-50%. Reviving construction will be critical and to do that, you have to bring interest rates down. Then people can borrow, people can build. It’s time that we participate and revive the construction industry, which is a huge economy.

One last thing is agriculture. We sometimes think Sri Lanka is too small for agriculture. There is a concept that it doesn’t have land mass like India. That is true, but Sri Lanka can do a lot of value-added high-end agriculture, like the high-end tea that we do. There are many things Sri Lanka can do on the high-end side. We don’t have the critical mass or the landmass to do anything big, but there are areas like cinnamon that we can focus on. 

We must also activate our entire tea industry to go into a participation model, a partnership model where we activate all our Regional Plantation Companies to do more. This is another opportunity.

One other thing is that Sri Lanka should look at India as a market; India, Bangladesh, and Pakistan. India alone has 1.4 billion people. Sri Lanka has a massive market around itself within three to four hours’ of reach. We should look at being an India plus one. How can we be part of an Indian company, be part of the supply chain, where we manufacture a component in Sri Lanka and supply it to India? There are spillovers coming out of India to Sri Lanka. There are many things that we can do. 

We are already a logistics hub for India; 60-70% of our cargo or more than that goes to India on the transhipment side. We are very well aligned. We have to think beyond the 22 million we have as an economy.

On tourism and Mannar energy potential – these are things we have been talking about for a long time. We have been engaging in tourism for decades. Why are we still unable to properly capitalise on these areas? Is it a lack of expertise, political will, or staying power? Is it due to successive governments changing things?

In the case of tourism, I think we have too many organisations trying to promote tourism and too many bureaucrats trying to get tourism up and running. We have to have a central approach to the tourism business. 

We also need catalysts to come in. We have a lot of good local hotels. We have hotels like Shangri-La and Hilton. We need hotels like Four Seasons to come in. At that point we have to be very open-minded, we might have to give land at a very cheap price. Land reforms are critical; those policies have to change. 

We are not doing a good job activating the India corridor. India has about 100 million passport holders and 25 million active outbound travellers. Now how many travellers would come to Sri Lanka? Not even a million. So there’s a job to do – at least activating the subcontinent and looking at India as a market. 

There’s also a lot of work on the promotion side, such as increasing capacity. Governance is a big aspect of tourism. Do we have enough governance in terms of how we charge foreigners, how we manage the guides, all of that. I think there is a lot of work to be done on that.

Specifically in terms of large Foreign Direct Investments (FDIs) into energy, ports, and other lucrative areas such as minerals, we have investors who are willing to come to Sri Lanka but Sri Lanka has failed miserably on policy consistency. We come up with a policy; we change the policy.

We do a lot of work on the Ease of Doing Business Index. That’s not a bad thing; if you can bring it down to 50, it’s a very good place to be. Countries like Vietnam are in the 70s but get a lot of FDIs. Vietnam is very well positioned as a market with the supply chain, the skill set, and the right treaties so you can manufacture in Vietnam and export to the US and Europe.

We need to work with trade treaties, sign treaties with the right markets. We have to have an open mind about investors coming in. Land reforms have to happen and policy consistency should be there. How you achieve that would be through some kind of constitutional reform, with constitutional laws to protect investors, including for local investors. Investor protection is critical, otherwise we can’t get the FDIs.

Do you see foreign interest and investment coming in once there is consensus on debt restructuring and, if yes, in which areas?

Loads. People are looking at Sri Lanka for downstream petroleum, energy, tourism, and ports and logistics. There are also other niche areas where people come for manufacturing, still there are investors coming for apparel. There is enough appetite for Sri Lanka to attract enough investments.

We have to be very clear in terms of what we are offering. We can’t offer a tax holiday for one type of entity and not offer it to another. We have to have a very clear-cut plan on certain segments – on this segment, is it a tax holiday or a tax credit, for how many years? All this has to be clearly documented; be transparent above all else.

Isn’t there a massive lack in terms of transparency and plans? There’s really no strategy or roadmap in place, is there?

We’ve always had a strategy; strategies have been there but execution has been really bad. On transparency and governance, I don’t have to tell you what we have gone through as a country. We have failed miserably in terms of governance. 

In that backdrop, do you still see investors and big investments coming in?

Governance has to improve. The IMF has come up with a governance diagnostic framework for Sri Lanka; it is doing that for the first time in Asia. We don’t have to wait for the IMF to tell us what to do. As a community we should not always look at governments to fix the problem. We as the private sector also have to have governance. It is very important because it is a partnership between private and public sectors and all the communities.

We have to focus a lot on governance – how we drive things, how we deliver once we make a commitment, how we monitor profitability, efficiency, etc. Efficiency is a big area, again concerning both the public and private sector. Our efficiency levels have come down and we have to really focus on that.

One last thing is labour reforms. We have been talking about it and there is another plan now. We have to really focus on that and get it out. Again, when I say labour reforms, a lot of people talk about hire-and-fire kind of policies. We also need to look at employee wellbeing, employee benefits, and how we protect employees. That is very important. Unemployment insurance and employee exploitation of labour – all those things should be looked into. Labour reforms will be critical for any investor to come here.

How do you view the Government’s approach to getting the economy back on track and what are the key reforms you would recommend to speed up recovery?

I think it has done a reasonable job. It is grappling with many things. Right now the focus is to get this debt restructuring out of the way. That’s the most important thing. I think that the Government has performed really well on that. I think good work has happened on fiscal consolidation and all that.

However, taxing a very small population at 36% doesn’t really help. You have to broaden the tax base and add about another million tax files into the system. You can only do that by digitising the whole economy. We have to do a serious job in terms of digitising the entire economy, the community, something very similar to Aadhaar in India. That would be very critical. Documenting the investment framework as a constitutional law would be critical. 

The governance aspect and the State employee cadre – we have some 1.6 million people. We need to repurpose and right-size. You can repurpose; take people from excess areas and redeploy them in other areas where there is revenue. 

Pay the State sector well. We should not think that the right talent can be attracted into the sector if you pay very low salaries. Now we are paying Rs. 70,000-150,000 for a senior Government employee, which is not realistic. People are migrating and not joining the Government because of that. I am of the view that we should pay the cadre really well, bring it to about a million people, and run it as an efficient sector. This is critical for us to come up.

Looking ahead, what areas should Budget 2024 prioritise?

The Budget should be aggressive on revenue collection. It should seriously focus on revenue collection and there should be serious repercussions if you don’t pay taxes. I still don’t see that happening. Very serious revenue collection will be critical because that is a starting point. 

Then, according to our strategic pillars, we say tourism, ports and logistics, energy – a very clear-cut investment framework will be critical to bring in investments. We believe there is potential of $ 1.5-2 billion in investments coming our way in the next couple of years if we play our cards right.

Then the Budget should allocate some money for digitisation. I think that’s critical. 

Repurposing and right-sizing the State sector should also be a priority. Separately of course there can be other areas on how to revive the economy, bring interest rates down, special concessional loans for SMEs, supporting start-ups – all this will be critical from a medium-term perspective.