Adapting to endure: Exploring HNB’s vision for restoring vibrancy to the Sri Lankan economy

“You cannot overtake 15 cars in sunny weather…but you can when it’s raining” – Ayrton Senna 

By Jonathan Alles 

Managing Director/CEO, HNB

For all the historic challenges that Sri Lanka has overcome so far, the unfortunate truth is that our greatest difficulties still lie ahead of us. Sweeping structural reforms are urgently required across our nation’s economic, political, and social systems in order to slow Sri Lanka’s economic decline. 

However, in the context of what appears to be the opening salvo in a protracted period of high geopolitical tensions, and a looming global economic recession, it is insufficient for Sri Lanka to merely reclaim its pre-COVID economic status quo. Even before the crisis hit, our internal economic dynamics were already unsustainable. Moreover, the global economic landscape appears to have already shifted irreversibly. 

Rising US interest rates has led to capital flight and a drying up of Foreign Direct Investment (FDI) not just in Sri Lanka, but across emerging markets. This means that investment promotion is going to be significantly more competitive than it has been over the past decade. 

With the outbreak of war between Russia and Ukraine – two of Sri Lanka’s major export destinations for tea, and significant sources of tourism arrivals, have been cut drastically. Significant spikes in global crude oil prices and international shortages in fertiliser and essential agri-inputs are leading to worsening inflation, including in the world’s most developed economies. 

Enduring the immediate crisis: All roads lead to IMF 

These dynamics are only going to intensify as we move into the final months of 2022 and they are going to hit the most vulnerable economies and segments of society hardest. But it is important to keep in mind that Sri Lanka is not the only nation facing these difficulties. However, considering the size and scale of our economy, an effective response to these challenges could radically augment Sri Lanka’s competitive advantages on the global stage.  

It is unlikely that we can continue to rely solely on tourism and agriculture to sustain livelihoods at the grassroots of our economy. Instead, we must take the difficult but necessary steps – especially over the short-term - to ensure that we adapt to endure the lean times ahead. There are no other options, but this crisis can still serve as a catalyst for true progress. 

If we are able to not just start, but actually stick to a strict Common Minimum Programme of reforms, we can start to re-align our nation to dynamically capture opportunities emerging out of the on-going reshuffling of global supply chains over the medium-long term. 

As all Sri Lankans have now been made painfully aware, our biggest challenges stem from the lack of foreign currency reserves to service external debt, and pay for essential imports. The resulting downgrade in the nation’s sovereign credit rating has effectively cut us off from international funding. 

In order to regain access to international lines of credit, we have to rebuild confidence with the international financial community by clearly demonstrating our commitment to extensive financial re-engineering. 

This in turn hinges on our ability to enter into staff-level agreements with the IMF, followed by bilateral debt restructuring negotiations with our sovereign creditors and the publication and strict implementation of a realistic Debt Sustainability Plan, including fiscal consolidation through higher taxes, and drastic cuts to Government expenditure. Backed by an IMF agreement, we can also start to seek out further emergency assistance from other donor agencies and bilateral creditors. 

Rationalising priorities, sharing responsibilities

Especially crucial is the systematic reform of State Owned Enterprises in order to urgently maximise profitability by implementing realistic pricing and divest non-performing assets that drain public coffers. The funds generated through such measures must then be re-directed into extremely carefully targeted social safety programs with accountability. 

Direct cash transfers have proven particularly effective during the pandemic, and the banking sector will once again have to play a pivotal role in getting funds to where they are most needed in the economy. We are also seeing powerful examples of Sri Lanka’s corporate sector and philanthropists stepping up to assist Sri Lankans through the crisis – either through employee-focused initiatives, or broader community engagement. But now is the time for Sri Lankan companies and patriotic individuals to ramp up their efforts and show the world the true spirit of Environmental, Social and Governance (ESG). 

Our focus at HNB is mainly directed at Small and Medium Enterprises (SME). In addition to the multiple capital moratoriums, concessionary lending facilities, invaluable advisory services, and technical capacity building programs conducted by the bank, we are also passionate about levelling the playing field for Sri Lankan SMEs by providing them with a low-cost entry into e-commerce, digital marketing, and subsidised enterprise resource planning systems in order to strengthen their competitive ability both in domestic and export markets. 

In the wake of the fuel crisis, we have also been exploring more unorthodox interventions including setting up of marketplaces for SME across our branch network on weekends. Such models can help our most enterprising customers to at least sell their produce locally, and tide over the current crisis. At scale, such measures to encourage greater domestic economic activity have the potential to revitalise provincial economies as well. 

Focusing on the bright spots

While at present, good news is still hard to come by, there are already some bright spots in the midst of all the uncertainty and we see even more room for others to emerge. In the manufacturing sector, Sri Lankan apparel firms have long demonstrated that our nation has the capacity to compete on a global stage, leveraging technology towards creation of sophisticated, high-value niche products for export markets. 

Even Sri Lanka’s tea industry was able to respond to COVID lockdowns with the rapid launch of a virtual platform for the centuries old tea auctions. When applied at scale, this approach, of leveraging technology to drive optimisation in the agriculture sector is another area which shows great promise, particularly in utilising such systems to disintermediate the sector, and bring buyers and producers closer together. 

It is imperative that the public sector learns from these examples and also seek out affordable opportunities to leverage technology in order to digitalise and radically optimise delivery of public services. This means investing in the right kind of data architecture to drive process automation, and the creation of robust back-end systems to enhance front-end responsiveness at every level of the economy.  

Moving forward, it is equally vital that all stakeholders join together to help rationalise imports, and further develop our exports. We also need to systematically focus on attracting Foreign Direct Investment (FDI) into key sectors like, renewable energy, IT, education, healthcare in addition to tourism and industrial parks. All of these sectors are critical to putting Sri Lanka back on a sustainable path to prosperity. 

We need to encourage foreign players to set up operations in each of these sectors in Sri Lanka not only to create jobs, but to also elevate standards through competition, as well as technology and knowledge transfers. Only through such competition can local industries elevate themselves to meet global standards. 

Capturing non-traditional opportunities 

We also have to think outside the box in every sector. All current assumptions as to the trajectory and duration of Sri Lanka’s economic recovery are based on marginal optimisations of existing industries. But does such a mindset cover the full spectrum of monetiseable opportunities available to us? 

Sri Lanka is a land blessed with biodiversity. We have a massive variety of indigenous fruits and vegetables being cultivated informally, or simply growing in the wild. We have soil that can easily be adapted to cultivate high value non-indigenous crops as well. With the introduction of agri-tech, and de-centralised business models, we could link up Sri Lanka’s fragmented agricultural land, and more efficiently orchestrate production across these informal supply chains, in order to generate significant increases in our economies of scale, while harnessing and value-adding on the rich untapped bounty of uniquely Sri Lankan agri-products in order to exponentially increase non-traditional agri-exports. 

Between the rise of remote work, seismic geopolitical shifts, and the oncoming rearrangement of global supply chains, an entirely new category of opportunities may be opening up. Already large volumes of production is shifting out of China into ASEAN, and SAARC. With this shift in the global manufacturing base, Sri Lanka could play a complementary role, offering logistics, IT, marketing and other services that draw on the wealth of knowledge and creativity available in the country, to create lucrative service export opportunities. 

At a micro scale, we are already seeing an unprecedented increase in the number of Sri Lankans who have shifted to remote freelance work in service of companies in developed markets. With the right support, this new class of micro-entrepreneurs that earn in foreign currency, could play an integral role in boosting Sri Lanka’s service exports. Already HNB has responded to these opportunities with the launch of a tailor-made product bundle specifically for this niche, but we need to consider what more could be done to facilitate and encourage this trend. 

Cultural exports are another powerful, but undervalued commodity for Sri Lanka. A useful comparison is South Korea which utilised public-private partnerships to invest in their creative economy – in the form of music, television and movie productions – which are estimated to have contributed $ 9.48 billion in export revenue in 2021 alone. 

Especially when considering the success of artists like Yohani, we believe that Sri Lanka’s creative economy is another untapped gold mine for our nation. Given the wealth of talent already present in the country, the export of our services can help to rapidly expand foreign income, while the slower-moving but equally essential industrial investments are brought online. 

If we can harness the creativity, energy, intelligence, determination and resilience of our people, over the medium-long term, HNB is extremely bullish on our nation’s future. We are committed to continue serving as a true partner in progress to all Sri Lankans, and seeing our customers through the tough times ahead, and on to a new era of sustainable, equitable prosperity for all people in a fair and just Sri Lanka.