SLCB Cabraal: Sri Lanka follows might with money

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Dominic O’Neill
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Central bank governor says bank branches in north will double; New sovereign bond possible

Sri Lanka’s central bank governor, Ajith Nivard Cabraal, says the number of bank branches in the war-torn north of his country will almost double this year

"The new bank branches will ensure that money gets circulated in the north quickly, that remittances get delivered, and that people can get finance to set up new businesses"

Ajith Nivard Cabraal, SLCB

Sri Lanka’s central bank governor, Ajith Nivard Cabraal, says the number of bank branches in the war-torn north of his country will almost double this year.

In an interview with Euromoney during a visit to London, Cabraal says he has awarded 70 branch licences to be opened this year in the north. There are only 80 existing branches in the north, which is about a third of Sri Lanka’s land area. Cabraal says banks will also open branches in those areas most affected by the conflict, where there are no existing branches.

"We have persuaded banks to open branches and lend more in the north through moral suasion as well as through giving them various targets," says Cabraal.

HSBC became the first foreign bank to open a branch in the north last month. This was in Jaffna, the capital of the Northern Province. With state-owned banks holding roughly 50% of banking assets in Sri Lanka, the governor says the new branch licences in the north have been given in roughly equal proportion to state-owned and private banks.

One attraction for banks is a refinancing programme undertaken by the central bank. This is available to banks when they distribute concessionary credit to small agriculture and fishing projects, and to small and medium-sized enterprises in the north. The maximum available in the programme is an equivalent of $1,750 a project. The interest rate is set at 9%. Borrowers pay nothing for six months then pay back the loan over five years.

"These banks are going to virgin areas. They will get customers who will grow into big industrialists over the next decade or so. They are getting in there first," says the governor. He also points to good lending opportunities in tourism, as well as in retail and commercial construction.

"The new bank branches will ensure that money gets circulated in the north quickly, that remittances get delivered, and that people can get finance to set up new businesses," he says.

Cabraal, who is also an adviser to the president on economic matters, says it is all part of the effort to deliver the benefits of peace to those who need it most, in this case through the rapid delivery of credit in the Northern Province. "As long as the conflict continued in the north, the whole country was affected," he says.

The Sri Lankan government says it is spending billions of dollars on the reconstruction and rehabilitation of the north and east of the country. On the eastern coast an integrated industrial, commercial and tourist zone is being developed at Trincomalee. Big infrastructure projects are also under way elsewhere in the country. These include a new international airport, and the Chinese-assisted construction of a deep-water port: both at Hambontana, in the south.

Sri Lanka’s government defeated Tamil rebels in the north in May 2009, after a 25-year civil war. Since then, the index of the Colombo Stock Exchange has risen roughly 100%, climbing almost 30% above the level it reached at its previous high in early 2007.

"Sri Lanka has been a liberalized country for the past 30 years. But there was always the conflict in the north holding back the country. Now the conflict is over, there is a tremendous amount of interest in Sri Lanka. Many foreign investors are taking up positions early," says Cabraal.

Sovereign bond

With a budget deficit of 7% of GDP last year, the Sri Lankan central bank issued a $500 million five-year bond in October 2009 on behalf of the government, with a coupon of 7.4%.

Asked whether a follow-up issue was being planned, the governor says: "We have shown the market we are a serious issuer. This was not a one-off issue. We have given the investor community reasonable assurance we would be coming to the market at regular intervals, on a pre-planned basis, which would give them a greater market for their bond holdings." Cabraal also says that the October bond gave the private sector, as well as the government, a new peacetime benchmark.

"We were encouraged by the reaction in October," he says. "The response was phenomenal. It gave us the impression we had done the right thing by going to the market at that time, and that it would be an option we would pursue in the future."

Cabraal supports gradual and careful relaxations of such restrictions as foreign exchange controls and the 10% limit on foreign investment in Sri Lankan rupee debt. "Right now our 10% threshold seems to be adequate, and we would maintain that," he says.

However, he continues: "As Sri Lanka’s reserves have increased to a fairly significant level, and there are many remittances coming in, it gives us the opportunity to make certain relaxations as far as our overall foreign exchange management is concerned. We have set out plans to relax some controls which have been in place since independence, to support a more open economic policy."