Sri Lanka on the road to Greece

By Maheesha Mudugamuwa

Multiple loan schemes introduced by the Government are proving to be a heavy burden on the economy, posing threats of plunging the country into an economic crisis similar to that of Greece, according to some analysts.

One of the most attractive and much-talked-about proposals in the 2019 Budget presented to Parliament by Finance Minister Mangala Samaraweera was the “Home Sweet Home” loan scheme for newly-married couples.

The proposed loan scheme worth Rs. 10 million is repayable in 25 years with a two-year grace period and a proposed 6% interest rate.

The Government also introduced a separate scheme titled “Enterprise Sri Lanka” to empower entrepreneurs by providing them with financial facilities. Accordingly, it has introduced 15 loan schemes for 15 segments of the society such as Ran Aswenna, Govi Navoda, Riya Shakthi, Rivi Bala Saviyai, Diri Saviya, Sonduru Piyasa, Madya Aruna, and Arambuma, to name a few.

With all kinds of loans proposed by the Government, the experts warned that the country was not heading in the right direction. They are of the opinion that the economic growth of a country solely depends on having solid economic policies, and not by granting loan facilities in order to conceal the real situation. Recalling the currency collapse and inflation spiral experienced last year, the experts claimed that if the Government did not respond to the economic crisis properly at this moment, it would never get another chance.

Uncontrollable government debts plunged Greece into a crisis in 2017. The Greek experience was a wake-up call for countries to carefully evaluate their strategies for managing their debt.

Will Sri Lanka end up like Greece?

Committee on Public Enterprises (COPE) Chairman JVP MP Sunil Handunnetti told The Sunday Morning that the Government did not have enough funds to run the country and the cash flow deficit of the Treasury had hit a negative value. At the end of November last year, the cash flow deficit of the Treasury stood at Rs. 225 billion while the consolidated fund had a deficit of Rs. 285 billion.

“In such a situation, it is not practical for any government to offer loan facilities to people. Through the housing scheme, the Government only gives a two-year grace period – what about the rest of the years? The people will have to pay back the loans,” he stressed.
Handunnetti warned that the Government’s unwise decisions would put the entire banking system at risk.

“All these loans would be granted to those who would provide a paysheet. Then what about the others such as farmers and entrepreneurs? Aren’t they entitled for a home loan?” he questioned.

“First and foremost, there should be government security for the banks. What would happen if there is a change of government and the policies also change over time during the tenure of that government? The whole burden would be passed onto those who obtained the loan.

This is a trap set by the Government to get hold of the people’s money,” he said, adding that the Government was trying to circulate the people’s money in the system and restart their “economic machine”.

“This is not how a government should address their economic issues: There should be a strategy for money supply to the system through production, which is not restricted only to agricultural products, but extend across scientific and other products as well. Only through that, a government would be capable of solving the economic issues,” he noted.

Not practical

Commenting on the economic policies, former Central Bank Governor Ajith Nivard Cabraal said: “It is something unprecedented, that a government is proposing a loan scheme, and I don’t think anyone anywhere in the world has proposed something as such.”

He told The Sunday Morning that every bank had loan schemes and it was not the task of a government to propose loan schemes through their budget, as offering loans would impact the country’s economy. He said that he would have agreed with it if a commercial manager of a bank proposed these loans. But in this case, it was the Finance Minister who offered loan schemes named in all kinds of decorative names to the people.

“The economy is very vulnerable at present and every single macro fundamentalist is possibly in trouble; they borrow today at the highest rate that any sovereign borrows this year. The Government claims that they borrow at an 8.5% rate, which is the highest. The interest rate has shot up to 92%. I don’t see any action taken to change these situations either. The Finance Minister did not even mention that the country is facing problems with the depreciation of the rupee. Are we going to have a stronger rupee by allowing Rs. 6 billion for Gamperaliya?

“Contractors and companies that import fertiliser complain of not being paid. The banks have advanced money for the customers to pay senior citizens and they have not been reimbursed. Where is the country heading?” Cabraal stressed.

Banks at risk

UPFA MP Chandima Weerakkody stressed that the Government’s loan schemes had already become a burden to banks and referring to one of the state banks, he said that the Government had not reimbursed the funds undertaken at a lower interest rate.

Weerakkody, who is also a former chairman of the State Mortgage and Investment Bank (SMIB), said: “If we refer to Moody’s ratings, they have identified Sri Lanka as a country where the bank capital is at high risk and they have even issued a warning to the Government. In such circumstances, when you import an involuntarily heavy burden on the banks, they would simply collapse.”

Explaining further, he said the banks also follow the BASL III requirement, requiring them to maintain adequate capital. However, the moment banks fail to do so, he reiterated, the state banks would collapse.

Govt. confident

Explaining the Government’s objectives, State Minister of Finance Eran Wickramaratne told The Sunday Morning that all proposals made by the Government were practical.

“Gamperaliya is basically building the local infrastructure. Proposals have already flown in and they are currently being assessed. This is a very practical, down-to-earth programme which basically targets the development of village-level infrastructure. In some areas, these projects were already on the ground.”

Commenting on the ability of the Government to fund the programme, Wickramaratne said: “We have allocated money in the Vote on Account, and through the new budget, we have allocated new money. Accordingly, the Government proposed the allocation of Rs. 200 billion per electorate last year and through the budget, it has already allocated Rs. 100 billion.”

Highlighting the Enterprise Sri Lanka loan scheme, he said only the bank decides on providing the loan. The Government’s contribution is to subsidise interest.

Meanwhile, Hatton National Bank (HNB) Chairman Dinesh Weerakkody said that it was important to make sure that these loans were given to deserving persons because if it goes into the wrong hands, the investment would be futile.