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PANDEMIC EDITION
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M.Sc. Applied Finance Graduate Program Department of Finance Faculty of Management Studies and Commerce University of Sri Jayawardenepura
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Editorial
Students’ corner
A P P L I E D F I N A N C E
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Published by M.Sc. Applied Finance Graduate Program Department of Finance University of Sri Jayawardenepura Sri Lanka
Applied finance FOCUS
Prof. Chandana Gunathilaka Editor Pasan Karunarathna Co-editor
About Department of Finance The Department of Finance is one of the prominent academic departments in the Faculty of Management Studies and Commerce, University of Sri Jayewardenepura. It offers the B.Sc. Honors in Finance (Special) Degree program since 2001. The degree program is basically focused on the subject areas of corporate finance, investments, markets, and institutions. The primary focus of the department is to produce finance literate high quality graduates who are professionally fluent in financial market activities and other financing decisions in corporate environment. The Department of Finance has a team of academic staff with international and diverse inter-disciplinary exposure. It attracts a wide range of highly talented students from the Faculty of Management Studies and Commerce annually.
M.Sc. Applied Finance As the founder Head of the Department of Finance, Professor Weerakoon Banda initiated MSc. in Applied Finance Degree program in 2004. It was designed expecting graduates who will be able to work independently in their capacities in the industry, or professional practice, by applying the specialist financial knowledge that this course aims to provide. The Degree prepares students to apply advanced knowledge for professional practice, scholarship and further learning corresponding to current SLQF level 9 and 10 qualifications.
Applied finance FOCUS
M.Sc. Applied Finance Teaching Faculty Internal • • • • • • • • • • • • • • • • • •
P.A.N.S. Anuradha, PhD Prof. Y.K. Weerakoon Banda, PhD Snr Prof. D.B.P.H. Dissabandara, PhD Prof. A.A.J. Fernando, PhD, FCA P.J.S. Fernando, PhD Prof. Chandana Gunathilaka, PhD, FCA Snr Prof. K.D. Gunawardene, PhD Ms. S. Ilumbetenna N.S. Nanayakkara, PhD Prof. P.D. Nimal, PhD Prof. K.L.W. Perera, PhD M.S.S Perera, PhD Prof. M.D. Pushpakumari, PhD Prof. R.P.C.R. Rajapakse, PhD C.M.C. Silva, PhD Prof. Hilary E. Silva, PhD M.A.K. Sriyalatha, PhD R. Weerasinghe, PhD
Visiting • • • • • • • • • •
Mr. Sugath Alwis, CFA, Associate Director, Fitch Ratings Mr. Nandika Buddhipala, Chief Financial Officer, Commercial Bank PLC Mr. D.M.U.N. Dissanayaka, Managing Director, CBC Finance Ltd Mr. Daham Gunasena, General Manager-Finance, Ceylon Biscuits Limited Mr. Chamil Hathurusinghe, Finance Manager, Dilmah Ceylon Tea Ms. Ranmalee Jayasuriya, Manager Customer experience, Union Bank Snr Prof. H.D. Karunarathne, PhD, University of Colombo Mr. S.N.B.M.W. Narayana, Senior Management, Peoples Bank Mr. Hemantha De Silva, FCA, Finance Manager, DRH Logistics M.K. Wanniarachchige, PhD, University of Ruhuna
Applied finance FOCUS
Editorial FOCUS is focused not only on the exchange of academic ideas involving research but also on the exchange of industrial experiences that may enrich society with new knowledge. It is a compendium of student, practitioner and academic views.
Prof. Chandana Gunathilaka
Human 'fragility' was a direct lesson of COVID19 pandemic, which science makes us be sustainable? Nevertheless, the technology began to flood at each household at least the teachers came to the children's home online. Thus, we recognize many opportunities for improvements and no exception for finance and wealth managers. The fruits may be all good if the transition is managed in the desired direction and the responsibility is partially at the citizenry. We acknowledge the fact that Sri Lanka's infrastructure and technology know-how is far behind. Yet, one of the top drives of the under-developed is the attitude the society hold. Each of us feels a rising economic crisis today, and it is uncertain who survives the turmoil. Hence, it is quite clear that the individual citizen must leave their conditioned mindset in a new recovery strategy. It may be simple things like reducing waste plate food, looking for homegrown chili, believing in traditional herbs, cycling, using biogas, re-using the shopping bags.
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A simple saving can go a long way if everybody does so. Perhaps, advanced thinking like working after office hours at carpentry, garment factory, restaurant, producing mushrooms or even paper bags, or taxi service would certainly make us a potential developing nation. We need to develop patience, wait in the queue, give a chance to the vehicle in front, or let other people talk first. The intellectual thinks first, others talk! In this issue, you have a sparkling lineup of contributors whom our editorial board extends a great appreciation from page 03 The Financial Professional 4.0 by Mr. Daham Gunasena, page 07 Neo Banking by Ms. Ranmalee Jayasuriya, page 11 Shrinking Foreign Reserves by Ms. Anne Kanthimalar and Ms. Dilini Christine, page 14 Cyber Security in Finance by Ms. Madusha Amarasena, page 17 Role of Financial Systems on Climate Change by Mr. Pasan Karunarathne and Page 21 Crisis at Country Level by Mr. J.C Gamlath It is timely thinking of the contributors and I hope you enjoy the read. Finally, I end this editorial by inviting potential authors to detect the opportunities for knowledge development for the finance community of Sri Lanka.
Prof. Chandana Gunathilaka Professor in Finance University of Sri Jayewardenepura December 2021
Applied finance FOCUS
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THE FINANCE PROFESSIONAL 4.0. The Finance Function is undergoing a generational shift. The increasing automation of technical accounting and finance tasks, alongside a greater appetite for technology within Finance teams, has meant that the role of Finance professionals is rapidly morphing. For professionals in Finance Function 4.0, there is one key principle: we must create value. Finance professionals are no longer ancillary - that is, they no longer simply provide support or information that is passed up the chain. Instead, they must take an active role in driving better outcomes throughout their organization.
Mr. Daham Gunasena General Manager Finance Ceylon Biscuits Ltd
So what does this mean in practice for the new Finance professional? And how is value creation different in the Finance Function 4.0?
Applied finance FOCUS
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The new day-to-day Finance professionals in the new paradigm are doing far more than sitting in front of a screen analyzing numbers. Of course, the nitty-gritty of analysis remains important, but it is no longer the whole story. The days of siloed working, with Finance professionals cordoned off from other business functions, are over.
So, in addition to the numbers themselves, Finance Function 4.0 professionals need comprehensive communication skills. This new landscape is about relationships - about communicating the meaning and importance of the data that is being analyzed, and about signposting the ways in which it can be used to make better decisions throughout an
It is also no longer enough for a Finance professional to simply have top-drawer SQL skills. There is an increasing recognition that these are not the be-all and end all of finance work. Instead, they are tools that should be put to work in the service of broader value creation within an organization.
organization. In Finance Function 4.0, practitioners take on a more fundamental and more embedded role within their business.
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In order to succeed in this paradigm professionals must have a holistic understanding of their organization, bridging gaps between data and action. Modern Finance practitioners need to think beyond the established boundaries of the Finance Function and focus not only on the inputs they are analyzing but also on the outcomes that can be produced through the application of that analysis. Until recently, the Finance Function was about pointing out gaps or opportunities in business processes and strategies and then passing the baton further up the chain where solutions would be devised. By contrast, in Finance Function 4.0, professionals don't just find the gaps - they also drive the actions required to plug them. It's not just about providing information, but instead about turning that information into actionable insight and taking responsibility for the dissemination of that insight throughout an organization. Measuring success in the Finance Function 4.0 Clearly, such a significant shift in the scope of the Finance professional's work also requires a change in the ways we measure success. How do we know when the new Finance Function is performing well? Meeting or beating targets set by leaders in the organization will, of course, remain crucial. But measuring success in the Finance Function 4.0 is not only done through quantitative work - there is also an important new qualitative aspect.
Success in Finance Function 4.0 hinges on the depth and breadth of Finance professionals' contribution to their organization. How are you helping across the business? Are you providing not only information but also strategies and recommendations to ensure that the information is leveraged to produce better real-world outcomes? Are you going beyond simply reporting, and instead playing an active role in the development of the business? In order to measure this impact, Finance professionals need to consider new metrics, sometimes borrowed from other business functions. For example, at CBL we use customer satisfaction surveys based on feedback from business leaders. This "customer satisfaction" scoring gives us a firm handle on the real-world outcomes of our work and is a useful tool for all modern Finance professionals. This new landscape also requires Finance professionals to adopt a different approach to career development. It is now important for practitioners to document the value-add they have delivered within their organizations. By demonstrating your creative and strategic input (and, crucially, the outcomes that were derived from them), and not only your technical proficiency, you will be wellplaced for more rapid and fulfilling career progression. From cost center to profit driver For too long, the Finance Function has been treated as a cost center - an overhead that needs to be minimized and streamlined. Page 05
The explosion in automation has meant that huge swathes of Finance activity can now be carried out with little human input. This sounds like a disaster for Finance professionals, but in fact, it is the opposite. Modern Finance practitioners have a huge opportunity to broaden the scope of their work, moving up through the value chain and driving better outcomes for the organizations in which they work. As machines take on more of the technical work, Finance professionals can begin to fulfill their real potential as crucial hinge-points within the business. It's time to stop thinking of the Finance Function as a cost center, and instead, recognize its importance as a profit driver.
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Banking in a Digital World and Future of Banking: Transformation and Trends in the Banking Industry in the Digital Era
Ms. Ranmalee Jayasuriya Manager Customer Experience Union Bank of Colombo PLC Visiting Lecturer M.Sc. Applied Finance Graduate Program
Applied finance FOCUS
In the last three decades, the banking sector has seen a profound transformation owing to the changes in the global financial environment. The major change witnessed in the banking sector has been great advances in financial innovations and technologies. The improvement in financial innovations and technologies has made electronic banking an intense part of the banking sector. Primarily a bank functions as an intermediary and the internet is changing the way how financial service providers conduct their role. This fundamentally changes the nature of banking which in turn change the nature of the banking services and the way those are delivered. Page 07
As a result, in order to compete in the everchanging digital landscape, banks have to adapt to the changing enviornment. Today’s demand in terms of banking is: anytime anywhere banking. This requires innovative, robust, secure, optimized solutions that are ready to meet the expectations of empowered and techsavvy customers. In today’s context, technology is reshaping the financial ecosystem and the future of banks. New players, such as startup companies specializing in financial technology as well as existing technological companies, have started providing financial services conventionally provided by banks. At the same time, increasingly digitally advanced customers, especially millennials and postmillennials, are demanding more convenience and better customer services through mobile or tablet platforms. Furthermore, the COVID19 pandemic has resulted in an acceleration of the adoption of digital technologies in all areas including financial services.
Therefore, to stay competitive with new players, attract customers and reduce costs, major global banks have set digital transformation as a business priority in the coming years. Digital Transformation in the Banking Industry Digital transformation is the use of new and rapidly changing digital technology to transform business activities, competencies, and business models. The digital transformation in terms of the banking industry can be classified under two dimensions: technologies utilized and services impacted.
. Some of the popular technologies that have been used in the banking industry include the cloud, artificial intelligence (AI), big data analytics, blockchain and mobile technology. In terms of banking services affected include payments, lending, asset management, and communication. For example, a large number of banks are switching to cloud technology to reduce onsite infrastructure management and AIpowered chat boxes that imitate human conversation and messaging applications are currently being tested to replace the traditional call centers. Digital Transformation is far beyond just moving from traditional banking to a digital world. It is a vital change in how banks and other financial institutions learn about, interact with and satisfy customers.
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An efficacious Digital Transformation begins with an understanding of digital customer behavior, preferences, choices, likes, dislikes, stated as well as unstated needs, aspirations etc. Thus, this transformation leads to major changes in the organizations, from productcentric to customer-centric view. Thus, the ongoing digital transformation is vital for banks’ long-term competitiveness, and more broadly, for financial stability and inclusion. Future of Banking The banking industry of the future will look radically different from what it is today driven by some revolutionary changes. The pandemic has reshaped our lives dramatically, as to how we operate in our daily lives. For example, shopping, travelling, working, to even how we bank, and has also driven a change in consumer behavior. Consumers have become more and more demanding of digital experiences. The pandemic has only amplified the need for easy access to banking products, services and information.
Given that most of the customers are now comfortable using online channels, the traditional ‘customer loyalty’ for physical proximity of a branch is now being influenced by personalization and customization provided through digital offerings and solutions. Few key purchase drivers would be ‘Value for money’, ‘Ease of buying’, ‘Personal safety’, ‘Customer Experience’ and “Personalization”.
“Neo banks” is a new wave and considered as the next evolution of banking. The banking and financial services industry is turning its focus towards innovation to prepare for a future that will be increasingly driven by technology. Key trends driving these innovations include ongoing digital transformation, collaboration with FinTech, and the increasing role of artificial intelligence and robotics.
In order to stay competitive banks and financial institutions should re-define themselves as agile technology companies since customer preferences, demographics and lifestyles change. “Neo banks” is a new wave and considered as the next evolution of banking. Unlike traditional banking, neo banks are not burdened by legacy technology and are operating with greater agility. Neo banks can offer personalized experience and seamless interaction craved by a generation who demands a smart digital experience.. Super apps as an emerging technology, primarily serve as a single portal or app to a wide range of virtual products and services.
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The most sophisticated apps consolidate a gamut of services to create a seamless banking experience. One app, one signin, one user experience, for virtually any product or service a customer may want or need. There’s also a range of emerging Payment Technologies offering several payment options which would also dominate the future and broadly revolve around Biometric Authentication, Invisible payments, Voice enabled payments, Face recognition, QR Code Payments, etc. “Digital footprint” is the way forward and while there is a growing demand for invisible payments, the future bank should be a bank that “travels” by removing frictions from the customer journey. Use of big data, artificial intelligence, advanced analytics and cognitive computing are also areas of concern for growth in this digital era.
Improvements in integrated multichannel delivery, redesigning/enhancing digital experience for consumer, enhanced data analytics capabilities and finding ways to reduce operational cost through automating core business processes are also considered as areas of importance. Few of the trends that can be seen in today’s context: Omni Channel Strategy for a 360 degree customer view, creating a wow factor for the Customer with Digital Onboarding and Open Banking. Additionally, we could also see AI driven decision making and Innovation through Fintech Collaboration. Banks are also driving operational efficiencies through Digitization, managing compliance cost in an increasing regulatory environment and providing cloudbased solutions for infrastructure resiliency and efficiency. Therefore, it would be safe to say that the future of banking is ‘Digital’.
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SHRINKING FOREX RESERVES AND THE DUBIOUS FUTURE OF OUR NATION Ms. Anne Kanthimalar Financial Executive Camso Loadstar (Pvt) Ltd
Ms. Dilini Christine Executive Officer Commercial Bank of Ceylon PLC
Tourism revenue shrank from a whopping $307 million in Jan 2020 to $7 million in Aug 2021. Applied finance FOCUS
Forex crisis is a hot topic in almost all platforms in the country. Sri Lankan government declared a state of emergency on 30.08.2021 as an ailment for the soaring food prices and got armed forces involved in the rationing process. What made Sri Lanka to reach this? You rule it out to the pandemic? It’s merely a trigger that resulted in hidden lava bursting-out, and if not addressed precisely and promptly, it could drag-down the proud legacy of the pearl of Indian Ocean into rags. Due to the pandemic & long standing lockdowns, country’s main income sources took a hit. Tourism, which represents over 10% of the country’s GDP and brings in foreign exchange, was significant among them. Tourism revenue shrank from a whopping $307 million in Jan 2020 to $7 million in Aug 2021. Page 11
In tourism, it’s not just about the tour-operators and the hotels. There are many industries that are intertwined and make an earning from tourism such as the traditional art & craft industries. Even the Central Cultural Fund lost their dollar income due to the sudden plunge in tourist arrivals. As a result of shrinking revenues and increased health related imports in the pandemic, forex reserves of the country dwindled from over $7.5 billion in 2019 to around $2.8 billion in July 2021. In an effort to revive the reserves, Sri Lanka opted to obtain currency swaps from China, India, South Korea & Bangladesh. Also, we had to scrape the remaining foreign currencies to source the imports and were faced with rupee depreciation by around 8% so far this year.
For Sri Lanka, a net importer, this posed great threat of inflation. Many commodities such as construction material, fuel, sugar, flour, rice sky rocketed in price causing social unrest and the government was cornered to declare a state of emergency. As a chain-effect, ability to pay-off the debt mountain reduced. According to CBSL, in 2020, government debt to GDP ratio is 101%. Sri Lanka made a bond repayment of $1.3 billion using foreign reserves making a narrow escape from the borrowing crisis but still, there’re two more bonds worth $3.75 billion that will be due in 2022 & 2023. Fitch ratings of the country came down to CCC which is expected to affect the FDIs.
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Abrupt fertilizer ban affected the agricultural production increasing the need of food imports & reducing tea exports. Human rights allegations are suspected to affect the lucrative European exports and the extreme weather conditions affected almost all areas adversely. We can bounce-back if we adopt an exportoriented growth model and ideally stop depending solely on imports for essential items. Private-public partnerships in main sectors is recommended to be promoted. Restructuring is a must-have for progress & it will have to be a collective effort of all citizen as one. Most importantly we’ll have to walk the talk without just filling policy reports with alluring words.
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Rising Need for Cybersecurity in Finance
Ms. Madhusha Amarasena Lecturer Sabaragamuwa University of Sri Lanka
Applied finance FOCUS
As a result of the Global Pandemic, most organizations, even in the Finance Industry, deployed remote working solutions worldwide. It was no secret that the security of the organization also has been decreased parallelly to the remote access of the employees. Financial institutions are the best targets of cybercriminals. The number of ransomware attacks in the financial institutions, mobile banking trojans, DDoS attacks, and also the higher spread of cybercrimes has been reportedly increased during 2021.
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Financial services are the heart of any economy, and a single cyberattack will be more than enough to corrupt the whole economy in one country in seconds. According to Forbes magazine, even with significant spending for cybersecurity, many organizations have faced significant data losses in recent history. Because of the continuation of the digitization of financial services, the obsolescence of financial systems, cloud migration, and the connections with third-party information systems, most of the cyberattacks have been caused in the financial industry. It seems that most of the employees do not have a proper awareness regarding cyber security and cybercrimes. Financial Institutions can educate their employees regarding how important it is to obtain knowledge on cyber security and how to prevent harmful and unintentional behavior against the organization's cyber security.
Monitoring third-party risks and leveraging cybersecurity data also can be easily implemented in the organizational context. Minimizing the data transferring between the networks, enacting basic cyber hygiene within the organization, and enhancing the engagement of incident management are also some other options that the companies in the finance industry can follow to avoid the damage from cybercrimes. Not only this year, according to the professional experts, 2022 is also yet to be welcomed with Bitcoin Thefts and local currencies plummeting, MageCart attacks, internalization of the cybercrime ecosystem operations, etc.
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To prevent such higher exposure to cybercrimes, modern financial organizations tend to collaborate with Real-time Intelligence, Cyber Insurance as well as Bug Bounty. However, yet no solution has been guaranteed 100% security against cybercrimes. Like the safety and security measures on the road, not all accidents can be prevented with seatbelts and airbags. With the improvements and innovations in Informational Technology, the nature of cybercrimes also will be updated and modified. Therefore, it is the responsibility of the financial institutions to upgrade and develop protective measures against the new possible cybercrimes according to the gradual changes in the dynamic business world.
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Mr. Pasan Karunarathna Associate Financial Control Analyst Asian Development Bank
According to Asian Development Bank USD 26.2 trillion is to be invested between 20162030 for developing Asian countries as response to the green and climate changeresilient infrastructure.
Applied finance FOCUS
ROLE OF FINANCIAL SYSTEMS ON CLIMATE CHANGE Banks, other financial institutions, capital market such as stock exchanges or bond market play a vital role in economic growth as it exchanges surplus funds between deficit units which leads efficient & effective utilization of funds of the economy. However, with the development of new challenges in the globe these traditional roles will have to reshape not only to thrive an economy but also to survive the human being in the planet.
This article talks whether global financial systems are ready to face the climate challenge and the readiness of Asian economies towards climate change responses.
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Climate change, which is resulted due to green gas emissions, deforestations & many other human activities. So, the collective climate effort is required to face this challenge, and this was agreed in Paris Agreement in 2015.
One of the key initiatives and latest topic is green financing. It promotes & enhance funding on achieving sustainable development goals.
It aims to keep the global temperature rise in this century below two (02) degree Celsius above preindustrial levels and limiting the temperature increase even further to 1.5 degree Celsius.
In addition, green financing is an arm of sustainable financing which is promoted by Organization of Economic and Cooperation Page 18
and Development. OECD has been estimated that in order to achieve climate and development goals in global there should be an USD 6.9 trillion of annual investments in infrastructure until 2030. Next look at current level of implementation of green financing in capital markets such as stock exchanges & bond markets.
“Sustainable Stock Exchange Initiative” (SSE) is introduced as a response among equity markets which promotes green products and services among investors, greening financial markets, strengthen the environmental disclosure and grow green dialogue. This is a voluntary action plan where 114 stock exchanges around the world being taking part of. .
Another key introduction is Climate Bond Initiative which the objective is to mobilize USD 100 trillion bond market as response for climate change solutions. This set up is aimed at developing Climate Bonds Standards and Certification Scheme, Policy engagement and market intelligence work. As of 2021 Green Bond Market has been issued USD 1.5 trillion worth of government bonds.
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Asian context Asia is a key part in the climate change risk which accountable for 1/3 of total carbon dioxide emission in the world. According to University of Notre Dame’s (2017), Global Adaption Index, South Asia, Southeast Asian countries are more vulnerable to climate change while economic, social, and governance readiness is to be improved.
According to Asian Development Bank USD 26.2 trillion is to be invested between 2016-2030 for developing Asian countries as response to the green and climate change-resilient infrastructure.
Out of this 56% investment is needed for power, 32% for transportation, 9% for telecommunications & 3% for sanitization. Further it stressed out there is a very lower level interest shown by Asian financial institutions to global sustainable finance initiatives i.e 122 out of 1874 signatories to the Principles for Responsible Investments
Therefore, ahead of key issues that the world is facing currently climate change is one of the biggest challenges that all of us are facing and which require collective climate responses.
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Crisis at country level Excerpt of events happened in the past and the ones happening at present
Mr. J.C Gamlath Credit Risk Analyst Commercial Bank of Ceylon PLC
He who is quick to borrow is slow to pay
Applied finance FOCUS
Sri Lanka (SL) exhibits a negative trajectory of Public Debt. In the interim, data hosted on public domain does not accurately reflect SL’s debt burden and its allocation among external lenders. This is because SL’s regular reporting of debt is limited to a breakdown of external debt held directly by the central government only, and excludes external debt held by other government agencies such as stateowned enterprises (SOEs). However, SL has adopted a penchant to finance her budget deficit and take up overly optimistic infrastructure projects by resorting to “quickborrowing”. The increase of oil prices due to both oil crises (19731974 and 1979-1980), the recessive economic trends in industrialized countries and the sharp increase in interest rates have all had a considerable impact on peripheral economies.
Then emerged the Eurobanking concept, which was a hasslefree avenue to raise finance as it lacked government regulation and, all contracts adopted a “free market” basis. Developing countries like Argentina largely embraced this new “brother-in-loans”. Since it was assumed that sovereign debtors would not default, lending to these countries was conceived as a perfect business by most creditors. International lending expanded until 1980.
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Only then did the international community begin to realize the enormity of the problem it had created during the 1970s. Argentina’s total outstanding debts accounted to USD 6.4 Bn in 1973 and it grew up to USD 45.5 Bn in 1983. In this ball-game was IMF who bailed out Argentina many a time, as times got tough. After treading perilous waters did Argentina default on her debt in 2001. More defaults followed in 2004 and 2020. In gist, Argentina exercised “quick borrowing” and little did she bother about the repayment in the absence of “premonition, prudence and providence”. Argentina’s “Inflation has often been in the double digits, even as high as 3000%, resulting in several large currency devaluations” (World Bank)
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SL displays similarities to what Argentina went through. Generous “lending-limbs” such as “Eurobanking” lured Argentina to borrow lavishly. SL has instead, “ChineseCharms” to which she has grown her overwhelming indebtedness. Since 2014, SL’s foreign debt shot up, reaching 42.9% of the GDP in the 2019. The onset of the pandemicinduced global recession accelerated the crisis and by 2021 the foreign debt rose to 101% of the nation's GDP. Vast majority of the foreign debt is owed to China. Between 2005 and 2015, SL called on “quick borrowing” from China, for expensive infrastructure projects, amounting to billions and amassed a pile of debt. Exhibit 01 illustrates such loan growth to China.
“Chinese-Charms” pitch in to SL debttale chiefly from 2013. As illustrated in Exhibit 01, with just over Rs60 bn on the books in 2013, Chinese debt stock reaches Rs150 Bn in year 2018, within a time period as short as 05 years. Period following 2018 portrays a steady downtick, however, recent developments in the Colombo Port city and other largescale infrastructure development projects invites insidious thought to SL-China debt-tale.
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Of all that accelerated at a pace, ISB based debt raising demonstrated a significant growth almost in- par with Chineseloans. SL’s ISB stock stood at around Rs 660 Bn in year 2014 and it surpassed Rs 2,500 Bn mark within 05 years. Whereas, the GDP growth rate hovered in the range of 5% during this period and it plunged up to 2.3% in 2019. A recently published special report by Fitch read that “Sri Lanka’s largest banks are the most susceptible to heightened sovereign risk due to their greater exposure to foreigncurrency denominated government securities”. Accordingly, Bank’s high exposure to ISBs could induce ripple effects in the financial system even up to grassroots and cause systemic impacts.
What’s more toPay? A total of about USD22 billion in foreign-currency debt obligations are due between now and 2025, against foreign-exchange reserves of USD3.6 billion as of end-June2021. After the recent repayment of matured sovereign bond in July 2021, this reserves position would have further shrunk below USD3.0 billion mark. The nation still has two more payments totaling $1.5 billion that becomes due in the next 12 months.
Accordingly, it was more of a vogue that SL continued growing her loan-book extravagantly. As illustrated in Exhibit 01 and 02, both ISB issuances and Chinesedebt grew in tandem, during the same period whilst the country’s GDP espoused rather a negative footing.
Exhibit 04 depicts the dire state of the total debt, eventually surpassing 100% mark as a percentage of the GDP, in year 2020.
Exhibit 05 expresses the composition of debt ownership. Although Chinese debt component is quite imperceptible in the illustration, China, among other creditor nations and when compared with “countries other than China”, records a static growth in terms of loaning SL during the years concerned.
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Ceylon and the railway project During the time when SL were a colony of the British, a norm called the “Sinking fund” prevailed, which was one that was implemented when Ceylon borrowed from London a sum of £ 3.1 million, in the late 19th century. Contrary to what many believe, not the entirety of the money spent on the railway system was financed out of local resources. It was principally financed out of loans raised from the London capital market. But when approving these borrowings, the Colonial Secretary had laid down two conditions. One was that the country should use the loan proceeds “only for the railway project and not for any other purpose”. The second was that the railway system should be operated with a surplus and a part of the surplus should be transferred to a “special sinking fund” dedicated for servicing debt. By 1905, when the railway system had been fully constructed, the outstanding balance in the sinking fund was Rs. 41 million, while the debt liability was only about Rs. 39 million.
This great discipline was abolished during mid 1980’s on belief that the funds lying to the credit of the sinking fund was anyway languishing and same could be of better use at expenditure programs. The Argentinian debtanecdote never subscribed the tenets on “premonition, prudence and providence” as cited earlier. But the Ceylon railway project did. “Which of the two trails should SL walk?” is a simple question to answer however the subject appears to be an “elephant sitting in the room”.
Way forward Given the dire state of the economy and the waning national resilience, incumbent leaders need not advocate “blaming others and mishaps in past” theory. Candid disclosure of the economic status is considered important. SL rupee’s further depreciation is imminent, prices will be fickle,
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monopolistic market leaders will exploit the poor, financial system will underperform, “twindeficit” may continue to widen, unemployment might persist and reserves crisis could worsen unless credible strategies are implemented. IMF at SL’s rescue, in retrospect There had been two previous occasions when SL’s foreign reserves reached critically low levels. One was in 1988 during the heights of the JVP revolt. The other was in 2008 when the civil war intensified. In 1988, SL’s reserves fell to $ 277 million which availed an import-cover of only 1.2 months for the ensuing 12 months. Nation sought a Structural Adjustment Facility of SDR 156 million with IMF. This facility created confidence among the foreign investors, and from 1990 onward, the country was able to record surpluses in the BOP.
In 2008, foreign reserves fell to $ 2,560 million which created only a 2 months imports cover. Thengovernor conducted a series of road shows in major international financial centers to lure investors to invest in SL ISBs. But the mission prospectivewas not a success. Later, the nation sought IMF support and IMF was hesitant in approving an SDR facility.
Then Indian finance minister intervened and consoled the plight, he declared that if IMF did not approve this facility, India would provide these funds to SL. Afterwards, IMF approved an Extended Credit Facility of SDR 1,653 million for SL in late 2009. This action boosted the country’s foreign reserves to $ 5,357 million by end 2009 and $ 7,197 million a year later. Considering all these facts, it could be inferred that the prevailing debt-crisis is one that needs speedy action.
Remedies devised in the past could be taken as a guide to arrest the present situation. SL could also improvise and control the distress- situation since the country is endowed with tremendous knowledge and human resource. Whichever the case may be, the country needs prompt action. One may think that seeking IMF support is costly due to stringent conditions entailed therein, however, the rewards will most likely outweigh those costs. Meanwhile, the country could make use of the “sinking fund” strategy when obtaining new debt in order to avoid future detriments of this sort. Page 25
STUDENTS’ CORNER As an entrepreneur I was looking to enhance my knowledge in Finances. The field of Applied Finances attracted me to follow this course.
Mr. Dilan Rangana Director/Partner - CIAO PVT LTD Country Director - Zeropoint Pvt Ltd
I have chosen this program to pursue my higher studies in finance. Our course content is really useful in giving me background knowledge in applying theory into practice. I believe this program can give me opportunities to improve my technical and soft skills in the field of finance. It is my great pleasure to be the part of this program. Ms. Meera Kumarasoorier Associate Credit Analyst Acuity Knowledge Partners (Pvt) Ltd
I have searched master’s programs in finance in Sri Lanka and realized that the M.Sc. in Applied Finance in University of Sri Jayewardenepura is the best finance master’s program in Sri Lanka. University of Sri Jayewardenepura has a great lecture panel and provides great opportunity for students to get better knowledge on modern financial techniques in finance field. The contents this course provides both theoretical and practical knowledge in finance field. As well as students obtain a great opportunity to make better connections with finance specialists.
After completing my first degree, I just wanted to look forward to a master's program in finance for success in my career. I have selected the "MSc in Applied Finance" program at the University of Sri Jayawardhanapura because this is the only master's degree program with highquality content available in Sri Lanka. The course content matches well with the working environment and the industry requirements. Also, USJ has a well-experienced lecture panel in the industry, and it will be helpful for us to get more knowledge about the industry.
Ms. Nishara Goonethileka Associate WNS Global Services (Pvt) Ltd
Mr. Hasvin Lakchitha Account Executive Mclarens Group
A P P L I E D F I N A N C E
FOCUS 2022 COMING SOON M.Sc. Applied Finance Graduate Program University of Sri Jayawardenepura
A PROJECT BY BATCH 2021-2023