Elaborating on the‘Insight into Sri Lanka’s Economic Behaviour’, Executive Vice President – Treasury and Investment Banking at Nations Trust Bank, Indrajith Boyagoda shares his views on Sri Lanka’s current economic circumstances and the role of banking in this environment.“It is of significant importance that, the global economy is viewed from a macroeconomic perspective in order to understand the current economic context of the country. The present turmoil is not a ‘Sri Lanka only’ problem; it’s a regional and even a global phenomenon. Emerging markets (EMs) in particular were subject to substantial stress a few months back even while developed markets (DMs) were facing some structural challenges such as fiscal related stress in Italy, the Brexit related challenges in the UK and Sino – US trade war to name a few”, stressed Boyagoda.
Boyagoda further expressed “Sri Lanka and other EMs are impacted due to substantial net outflows of funds particularly to the US; the most visible effect of this phenomenon is the pressure on the country’s exchange rate. Most EM countries run trade and current account deficits. Their exports comprise mostly of primary commodities or low value added price elastic non-essential goods and services, while imports are quite substantial, price inelastic, mostly essential goods”.
“These countries also attract portfolio investments as against Foreign Direct Investments (FDIs). This combination results in structurally weak economies subject to negative implications of global volatilities. The recent political uncertainty that destabilized the local economy on top of such global volatilities exacerbated the situation causing excessive volatility in the local market.”
Commenting on the fundamental paradigm shift that is currently going on in the world, geopolitically and economically, Boyogoda explained that, “Governments in countries like the US, UK and some other EU countries are challenging China’s dominance and becoming increasingly nationalistic”.”
“China and the Asian region as a whole have been considered as the production hubs of goods and services whereas the US and the western world have been considered the consumers. This nationalistic ‘bringing production back home’ strategy is creating instability globally, in a system that had reached equilibrium for some time.”
Raising a concern on the post effect of the Global Financial Crisis (GFC) in 2008/2009, Boyagoda stated that, “When the world economy was almost at the brink of collapse, DM countries slashed interest rates to a near zero or even negative in some cases whilst releasing liquidity into their markets through quantitative easing to encourage an unprecedented level of consumption to revive their economies”.
“The resultant excess liquidity coupled with near zero interest rates in home countries led their way to EM countries (such as India, Indonesia and Sri Lanka etc.) which still had attractive interest rate regimes. Now there is reverse flow and hence some turbulence”.
Discussing the difference between Foreign Direct Investments and Portfolio Investments and the way they affect economies, Boyagoda further added that, “FDIs are foreign direct investments used for productive purposes. They will be longer term investments which will contribute towards real productive economic activity and growth that would result in production capacity expansion, increased trading activities and higher employment opportunities etc. Portfolio Investments on the other hand usually flow into a country’s capital market to invest in financial assets such as government and corporate bonds, shares. Drastic movements of these flows create substantial disruptions in countries if such economies are not structurally robust”.
“A majority of EM economies are not structurally robust and subject to extreme volatility in the event of a mass exodus of Portfolio Investments. This can affect a country’s ability to manage its economic activities. However, while we shouldn’t discourage Portfolio Investments, more attention should be on FDI build up which would insulate us against crises when global capital flows adjust themselves in the future.”
Highlighting on the steps that, Sri Lanka as a country can take to mitigate and overcome this crisis, Boyagoda added, “One of the main weaknesses in our economy is the underperforming export sector. For over two decades there had not been a proper national programme to boost our exports. However, it’s also about how to attract entrepreneurs in to export industries.”
“There should be a well-structured national program to adequately recognize contribution by exporters to the national economy. Furthermore; the country needs a national plan (and execution) not only for exports but also for the entire real external sector to boost foreign inflows that build healthy external reserves which are imperative for stable growth and economic performance.”
Stressing his views on sustainability and environmental factors and the industry direction towards setting its way forward and Nations Trust’s stance, Boyagoda said, “Environment and its protection for the future is a shared responsibility of all of us. As providers of capital to businesses and entrepreneurs, the banking industry can play an effective role by ensuring that the businesses are operated in an environmentally friendly and sustainable manner especially by restricting the borrowers and not allowing them to engage in environmentally damaging activities.”
In concluding the discussion on ‘Insight into Sri Lanka’s Economic Behaviour’, Boyagoda said, “Economics is not a very difficult subject to understand but its contents have far reaching consequences in our day to day lives. Whether we like it or not, we all are impacted by it and therefore, those of us who learn about it and understand the principles (and cause & effect) will hopefully, have a more responsible.
