Economic recovery mandates banks to be proactive

The construction industry can be the pivotal sector to stimulate economic activity across a wide spectrum – Pic by Shehan Gunasekara

Wednesday, 24 June 2020

The recently-held meeting by President Gotabaya Rajapaksa with the top team of the Central Bank (CB) requires the entire country to thank him for its outcome.

There was an overnight sea change by the CB which approved an economic stimulus of Rs. 150 billion for the business and construction sectors to recommence their businesses after the impact of the COVID-19 pandemic. The latter was mandated to lend at 4% interest. Therefore, the two sectors should quickly capitalise on this offer and commence on viable projects.

A direct beneficiary of the aforementioned stimulus is the construction industry. Its ongoing projects had to come to a standstill, causing the supply chain of consultancy firms, contractors, material suppliers, and a host of related entities to lose revenues resulting in massive layoff of employees who had no alternatives to earn livelihood for themselves and their families numbering well over 100,000.

Furthermore, the industry’s upward contribution to the GDP withered off in a flash. Consequently, an economic stimulus was not only a must, but also urgent to restart the economy.

In the follow-up of the CB’s decision, President Gotabaya Rajapaksa directed the State banks to “take the lead” in this key initiative for normalising the economy. At this critical stage development must be activated to show a quantum leap by economic activity in all parts of the country. In other words, the banks must not only be a lender to the borrowers, it must necessarily be proactive in promoting growth. 
Benefit towards the construction sector
The construction industry can be the pivotal sector to stimulate economic activity across a wide spectrum. A way forward for a truly proactive role for the banks will be to partner with the construction industry and the Urban Development Authority (UDA).

In the construction sector, the UDA, can identify in Colombo and in other parts of Sri Lanka infrastructure, housing (for different income groups) and urban regeneration projects in different parts of the city, to be implemented on a Public-Private Partnership basis, where the Government equity is the land.

If so, if each of the Sri Lankan commercial banks could use the money provided by the Central Bank for boosting the construction sector to become an equity shareholder in at least one development project identified by the UDA with a Developer from the construction industry, it will be the way forward.

In addition, the respective bank in its equity investment can request the Government to consider it in a manner that it would not hinder/jeopardise its interest from a compliance as well as from the operational performance perspective. If so, both the consultants and contractors along with a workforce of around 50,000 will immediately benefit.

Furthermore, the bank and the UDA, must select an architectural and engineering consultancy practice and a contractor, to work with the bank so that the same consultants and contractors are not duplicated in more than one project. The involvement of the banks will assure feasibility operationalisation through close monitoring of the project.

In addition, with a view to ‘jumpstarting’ the construction industry, the Government should check on the several internationally-funded projects, for example, KOICA is funding part of the Ocean University. The problem is to secure a land to implement the project. If a suitable land could be found, the project will take off immediately.

There may be several other projects ready for implementation in the different sectors, but, due to local impediments the implementation may be delayed. Once again, since the funds will come from overseas, the agreements should include at least 75-80% of the work to be given to the local consultants and contractors.

Furthermore, the World Bank, ADB and other internationally-funded projects for different sectors should be advised to use local consultants and contractors for their projects in Sri Lanka. On the premise that the Sri Lankan Government does not insist on using Sri Lankan consultants and contractors, at the time of signing of the contracts, the funding agencies use international consultants and contractors on the basis that Sri Lanka does not have the expertise.

If this change could be implemented, no doubt, while the project cost will be much less, the local consultants and contractors will have opportunities to participate in these projects.