ECONOMYNEXT – Sri Lanka will get 150 million US dollars from the World Bank for deposit insurance the World Bank said, following a reform to the country’s banking law.
Sri Lanka has high nominal and wildly fluctuating interest rates due to deep credit cycles fired by a monetary regime with conflicting anchors as found in most so-called third world countries, according to critics who have closely followed central bank activity over the years.
“Sri Lanka’s economic crisis highlights the need for strong safety nets to support the financial sector. Stable and reliable banking sector is essential for the economy, businesses and individuals, small businesses and poor households,” Faris Hadad-Zervos, World Bank Country Director for Sri Lanka said in a statement after the agency’s board approved the 150 million US dollar credit.
“Strengthening the Deposit Insurance Scheme will help protect the savings of smaller depositors, including women and people living in rural areas. It will also sustain the confidence in Sri Lanka’s financial system, a critical part of building the country back better.”
The financing will help boost reserves of SLDIS to pay insured deposits of failed banks and finance companies.
The SLDIS guarantees the deposits of households and enterprises up to 1,100,000 rupees which covers more than 90 percent of deposit accounts in Sri Lanka.
The island’s central bank is mis-used to boost growth by macro-economists inflating reserve money primarily by repurchasing bonds from the banking sector on various theories at different times (now potential output targeting, direct re-financing in the 1980s), driving mal-investments, critics say.
In the stabilization periods that follow in the wake of the inevitable currency crisis following liquidity injections, bad loans spike and some finance companies which have gone beyond vehicle financing into property, collapse.
Sri Lanka’s government defaulted on its foreign debt in 2022 after the most aggressive deployment of ‘macro-economic policy’ in the central banks’ history which were backed up by tax cuts, and the currency collapsed from 182 to 330.
“Strengthening the financial sector safety net is crucial for maintaining financial stability during a macro-debt crisis,” said Alexander Pankov, Lead Financial Sector Specialist and the Task Team Leader for the project.
“A robust deposit insurance system, along with enhanced supervision and resolution frameworks, will safeguard public confidence in the financial system and protect people’s savings.”
In parallel, the project will support institutional strengthening of the SLDIS in line with international good practices for effective deposit insurance schemes.
The SLDIS was established in 2010 and has conducted several payouts for failed licensed finance companies in recent years.
The legal framework for deposit insurance in Sri Lanka was upgraded earlier this year through the approval by Parliament of Banking Special Provisions Act, the statement said.
SLDIS should now be strengthened institutionally and financially for it to be able to effectively fulfill its legal mandate of protecting the financial sector stability.
Sri Lanka has also strenghtened its social safety net after tipping large sections of the population into poverty by currency depreciation.
Sri Lanka’s state and macro-economists got the powers to depreciated the currency in 1950, but was limited by law by subscription to IMF Articles until its Second Amendment. (Colombo/Nov10/2023 – corrected SLIDS deposit cover is up to Rs1,100,000)