Two years after the Central Bank bond scam, industries are bleeding to death!

It is now an openly-discussed incident that the former Central Bank Governor had misused his authority to allow a company that his son-in-law is a director/major shareholder of to make billions of rupees in undue profits at the expense of Government and other public funds. The subject has been discussed at many forums and media platforms and now a Presidential Commission of Inquiry has been appointed and the investigations are ongoing. 

It is said that if found guilty, the former Central Bank Governor and his connected parties who made the undue profits will be asked to refund the monies back to the Government. That may or may not happen, or the Inquiry Report may end up in another ‘no action’ box. Leaving that for the President and the Government to handle, as an industrialist in the country, I would like to bring to the notice of the public another effect of the bond scam that is profusely bleeding the industries in the country. 

Commercial bank interests shot up by 

over 6.5% and interest payable up by 93%

Prior to the bond scam in February 2015, the Average Weighted Prime Lending Rate (AWPLR) in Sri Lanka was about 6.5% per annum, and the cost of funds for Sri Lankan industrialists was around 6.5% to 7.5% per annum. Immediately after the bond scam, when the Central Bank accepted a bid for a 30-year bond at an exorbitant interest rate of around 12% per annum, interest rates of commercial banks started to rise. By December 2016, AWPLR in Sri Lanka had risen to 12% per annum and the banks had also increased their margins by a further 1-2%, adding a further burden to the borrower. Banks have also increased the interest rates of loans taken prior to February 2015. 

As a result, any industry that had taken a loan in 2014 at 7% (AWPLR + 0.5%) now has to pay 13.5% (AWPLR + 1.5%); an increase of 6.5% in the rate of interest. In reality, this amounts to a massive 93% increase in the interest component of the loan. For an example, if an industry had taken a bank loan of Rs. 100 million in 2014 and paid Rs 7.0 million per annum as interest, the same industry will now have to pay Rs. 13.5 million per annum as interest. Therefore, any industrialist who obtained a long-term loan on the AWPLR basis is now faced with an interest burden that he/she had never forecasted for. This is a deadly blow to any project in the manufacturing sector that also has to face numerous other challenges such as high electricity charges, higher taxes and increased employee remunerations.

The Government has failed to quickly arrest the major fraud at the Central Bank and that is not only allowing the crooks behind the bond scam to continue making money but also leaves the national industries bleeding to death through unaffordable bank interests. 

On the other hand, some other section of the Government is removing or trying to remove import tariffs for imported goods and tells the Sri Lankan industries to “either be competitive or close down”. Such officials argue that the reasons for the jump in the interest rate have nothing to do with the fraud in the Central Bank, and that it is a global situation. The graph showing AWPLR of Sri Lanka, India and Bangladesh clearly illustrates that their argument is totally incorrect.

From January 2015 to December 2016, Indian AWPLR has decreased by 1% and in Bangladesh the rate has reduced by 0.5%, whilst Sri Lankan AWPLR has increased by over 5%. Furthermore, you can observe that Bangladesh is maintaining a flat 7% per annum interest rate right throughout, showing the commitment of the government of Bangladesh to support Bangladeshi exporters. 

Banks are laughing

Whilst the industrialists are slipping down the hill due to the above bond scam, banks in Sri Lanka have made merry out of the mess and the confused situation at the Central Bank. All commercial banks have used the high Treasury bill interest rates and the increased AWPLR as excuses to gradually increase interest rates at their will. They seem to have squeezed the ‘maximum’ out from the borrowers and made huge profits as shown in the table.

From 2014 to 2016, the increase in profit before tax of the biggest bank in Sri Lanka is 54% and another two private banks have made increases of 86% and 68% over the same period. If the government fails to arrest this situation the trend will continue and the banks will make profits at the expense of the industrialists. 

Sri Lankan industrialists 

are left helpless

Industries in Sri Lanka come under the Ministry of Industry and Commerce. The minister in-charge seems to be burdened with many trade related issues and thus does not seem to have much time left to look at the dangers faced by local industrialists. Further, the Government seems to be stuck in resolving many day-to-day problems of the masses and thus the industrialists are left without any place to go to with their problems for proper action. 

Therefore, I strongly feel that there should be a Ministry of Industries that is fully dedicated and responsible for the development of all industries whether small, medium or large, and it should not be responsible for trade. This is because trade includes importation of essential food items and other finished products which are politically sensitive subjects. 

It is natural for the politicians to focus more on resolving cost of living problems through cheaper imports. Most of the time such imports go against the interests of the local industries. That is why one ministry cannot fulfil their responsibilities for the industries if that ministry handles import trade as well.

Government should step in with commitment to safeguard industries

At present, helpless industries in Sri Lanka are left alone on a slippery slope with heavy loads of bank interests, higher taxes, higher electricity charges, increased salary bills and unfair competition from imported products. They are faced with imminent danger of gradually slipping down to the bottom of no return unless the Government immediately adopts a clear policy to give necessary support and safeguards that industries in other countries receive from their respective governments. 

The Government reiterates the need to increase exports as a solution to the foreign exchange crisis, but it is unfortunate that no one pays any attention to the problems faced by the industrialists who are supposed to produce such goods needed for exports.

 (The writer is an entrepreneur and 

an industrialist.)