Lankans continue to splurge; loans to manufacturing, agriculture take back seat

Sri Lankans have mostly borrowed for consumption but borrowings for manufacturing and agriculture come at distant fourth and fifth positions, demonstrating the country’s increasing tilt toward a consumption economy at the expense of industrialization and food security—the key ingredients for a sustainable economy.  
An analysis of the total outstanding loans in the banking sector showed that 20 percent of the loans have gone into the consumption sector and is growing.
Loans to the consumption sector is closely followed by the loans to the construction and wholesale and retail sectors as the latter two sectors have absorbed 16 percent and 15 percent of the total loans outstanding. The manufacturing sector has absorbed little under 11 percent of the total banking sector loans – about half of the consumption sector loans – while agriculture, forestry and fishing has absorbed only 8.4 percent of the total loans. By end-March, Sri Lanka’s banking sector had Rs.6.7 trillion of loans and advances outstanding.

The lopsided distribution of loans mirrors the deep structural issue in the Sri Lankan economy since it was liberalized in 1977 – as it got used to consuming way more than what it grew and produced at home.  An economy absent of a solid agriculture and an industrial base is highly fragile and susceptible to the global market volatilities as such a country is often at the mercy of imports.

Such a consumption-oriented economy no longer generates jobs to its people and thus they either migrate or drive three-wheelers.

The bulk of the consumption loans makes the country to fund imports destabilizing the rupee.

The East Asian economic miracle, which is emulated by the present policymakers, have conveniently forgotten that those countries such as Malaysia reached economic prosperity by first having a stronger agricultural and manufacturing base at home and not by opening its economy for wild imports.

Relatively low funds into manufacturing and agricultural sectors also demonstrate how anaemic condition those two sectors remain and how little an investment is made for research and development and technology-based production.

Sri Lanka has done very little to plug their manufacturing sector into the East Asian supply chains and creating food security.

Specially a country with abundance of natural resources, Sri Lanka has certainly mixed up its priorities, the key economic indicators show. 

Sri Lanka has a US $ 11 billion hole in its trade account and the current account of the balance of payment is in deficit for decades.

Growing household debt has already become a thorny issue faced by the policymakers and it has virtually threatened the financial system as the non-performing loans have risen sharply.

As Mirror Business reported earlier this week, every Sri Lankan household had at least Rs.375,000 debt by end-2016, from Rs.250,000 by end-2014.

Industry non-performing loans reached 3.2 percent of total loans in April 2018 from 2.5 percent in December 2017. The consumption loans NPL ratio stands at 2.4 percent.

The consumption loans consist of personal loans, credit cards, loans and leases for vehicles and housing.

The growing consumption loans could haunt the policymakers as the population of a country cannot continue to live beyond their means forever.