New national development bank in the offing

The government will establish a new national development bank under its emergency relief package to provide concessionary rate loans to encourage identified sectors ranging from import-export trade, construction, small and medium enterprises (SMEs) and agriculture.

The proposed bank is expected during the first five years in office as it is identified under the government’s economic emergency relief plan as part of its manifesto aka National Policy Framework, which was unveiled during the final leg of the election campaign.

The idea to establish a larger national development bank was mooted several times by successive governments but it did not see the light of day as such an endeavour entails lot of ground work and state-sponsored capital.

The second term of the previous Mahinda Rajapaksa administration from 2010 to 2014 proposed the setting up of a larger development bank by merging the two development lenders, DFCC Bank PLC and NDB Bank PLC.

But it was shelved in 2015 after much work on due diligence was underway.

The two lenders have now gone on their own paths led by competent private sector management.

Another idea was also mooted to establish an import-export bank or an exim bank to provide financial assistance to firms engaged in foreign trade. But it also never took off.
Nevertheless, President Gotabaya Rajapaksa’s National Policy Framework has proposed a national development bank, which will entail both development banking and exim banking functions under a single entity.

The specifics are yet to be provided on the equity partners of the proposed new bank and how it would work alongside the Central Bank’s existing re-financed rural credit schemes and interest rate subsidy schemes of the Finance Ministry.

Classical market economists argue that subsidised credit destabilise the economy by stoking inflation and through currency collapse as this type of credit needs to be accommodated through money printing.

Sri Lanka has seen such boom and bust cycles generated every four to five years by the Central Bank creating monetary instability.

However, the counter argument is that when the market fails to provide support to some of the key sectors, targeted support to these sectors by the government through tax concessions, concessional credit and other structural reforms will help them to get back on their feet and add value to the economy in return when they become medium and large scale entities.