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Tuesday November 29th, 2022

Sri Lanka banks exceed revised SME lending targets

ECONOMYNEXT- Sri Lankan banks have exceeded revised lending targets for micro, small and medium scale enterprises (MSMEs) under programs with the Asian Development Bank (ADB), officials said.

"At first, we set some targets because there was no previous data, and we later revised these targets," ADB Financial Sector Specialist Takuya Hoshino said in Colombo.

"These targets were exceeded," he said.

The ADB had given 100 million US dollars in credit to the Sri Lankan government at Sri Lanka Inter Bank Offer Rate plus 50 basis points between 2016 and 2018, which had been borrowed by four local banks at policy rates.

The banks had in turn given loans to 1,750 MSMEs at retail market interest rates.

The maximum loan a business could take was 50 million rupees.

The program had targeted 5 percent of the lending to women-led MSMEs initially, and had expanded the target to 20 percent later.

By October 2018, 27.6 percent of the funding had gone to women-led MSMEs.

A target of 10 percent of funds to go to first-time borrowers had been increased to 20 percent, but the program achieved 26 percent.

A target of 50 percent of funding to go to agribusiness had been increased to 70 percent, but the banks had given 91.4 percent to the main target group.

Under a new 75 million US dollar credit line from ADB that was started in 2018, 41 percent of loans given were to women.

Due to the success of the ADB’s lending program, it has now won a bid to disburse a 12.5 million US dollar multilateral grant for developing female entrepreneurs in Sri Lanka, Carrasco said.

ADB Public Management, Financial Sector and Trade Division South Asia Department Head Bruno Carrasco said the non-performing loans under the credit lines are below the industry average.

"Because the loans are performing well, banks can continue to lend to MSMEs in the future through their own balance sheets," he said.

The program had included a 2 million US dollar technical assistance program from the Japan Fund for Poverty Reduction to train the MSMEs on good business practices.

Carrasco said around 30 percent of businesses in Sri Lanka felt access to finance was a major constraint to business.

A lack of understanding of accountancy, marketing and low financial literacy also discouraged growth of small businesses, he said.

The participation of MSMEs in the economy was low, and hindered exports and growth, he said.

Banks are usually more inclined to service repeat clients from urban areas, according to Carrasco.

Hoshino said banks have good reason to not give out smaller loans due to high administrative costs in keeping track of clients.

More efficient processes and a change of behaviour at banks could make MSME lending more sustainable, he said.

"We always encourage business-based lending, but banks have requirements for collateral," he said. (Colombo/Mar01/2019-SB)





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A new Sri Lanka monetary law may have prevented 2019 tax cuts?

ECONOMYNEXT – A new monetary law planned in 2019, if it had been enacted may have prevented the steep tax cuts made in that year which was followed by unprecedented money printing, ex-Central Bank Governor Indrajit Coomaraswamy said.

The bill for the central bank law was ready in 2019 but the then administration ran out of parliamentary time to enact it, he said.

Economists backing the new administration slashed taxes in December 2019 and placed price controls on Treasuries auctions bought new and maturing securities, claiming that there was a ‘persistent output gap’.

Coomaraswamy said he keeps wondering whether “someone sitting in the Treasury would have implemented those tax cuts” if the law had been enacted.

“We would never know,” he told an investor forum organized by CT CLSA Securities, a Colombo-based brokerage.

The new law however will sill allow open market operations under a highly discretionary ‘flexible’ inflation targeting regime.

A reserve collecting central bank which injects money to push down interest rates as domestic credit recovers triggers forex shortages.

The currency is then depreciated to cover the policy error through what is known as a ‘flexible exchange rate’ which is neither a clean float nor a hard peg.

From 2015 to 2019 two currency crises were triggered mainly through open market operations amid public opposition to direct purchases of Treasury bills, analysts have shown.

Sri Lanka’s central bank generally triggers currency crises in the second or third year of the credit cycle by purchasing maturing bills from existing holders (monetizing the gross financing requirement) as private loan demand pick up and not necessarily to monetize current year deficits, critics have pointed out.

Past deficits can be monetized as long as open market operations are permitted through outright purchases of bill in the hands of banks and other holders.

In Latin America central banks trigger currency crises mainly by their failure to roll-over sterilization securities. (Colombo/Nov29/2022)

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Sri Lanka cabinet clears CEB re-structure proposal: Minister

ECONOMYNEXT – Sri Lanka’s cabinet has cleared proposals by a committee to re-structure state-run Ceylon Electricity Board, Power and Energy Minister Kanchana Wijeskera said.

“Cabinet approval was granted today to the recommendations proposed by the committee on Restructuring CEB,” he said in a message.

“The Electricity Reforms Bill will be drafted within a month to begin the unbundling process of CEB & work on a rapid timeline to get the approval of the Parliament needed.”

Sri Lanka’s Ceylon Electricity Board finances had been hit by failure to operate cost reflective tariffs and there are capacity shortfalls due to failure to implement planned generators in time. (Colombo/Nov28/2022)

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Sri Lanka new CB law to cabinet soon as IMF prior action

ECONOMYNEXT – Sri Lanka’s new central bank law will be submitted to the cabinet as a prior action of International Monetary Fund with clauses to improve governance and legalize ‘flexible’ inflation targeting, Central Bank Governor Nandalal Weerasinghe said.

Under the new law members of the monetary board will be appointed by the country’s Constitutional Council replacing the current system of the Finance Minister making appointments.

“It will be a bipartisan approach,” Governor Weerasinghe told an investor forum organized by CT CLSA Securities, Colombo-based brokerage.

“The central bank’s ability to finance the budget deficit will be taken out. Thirdly the flexible inflation targeting regime will be recognized in the law as the framework.”

The law will also make macro-prudential surveillance formally under the bank.

There will be two governing boards, one for the management of the agency and one to conduct monetary policy.

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