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Sunday December 10th, 2023

Sri Lanka blames high interest rates on ‘structural issues’

ECONOMYNEXT – Sri Lanka has blamed ‘structural issues’ for high interest rates in the country, as large volumes of money was printed through multiple lender of last resort windows near policy deposit rates to force interest rates down.

“The reason for no (credit) demand in our view is market rates are relatively high in 14-15 percent when inflation is around 4-5 percent and economic growth is around 3-4 percent, so nominal growth is around 8 percent,” Central Bank Deputy Governor Nandalal Weerasinghe told reporters.

“If businesses’ incomes are growing at 8-9 percent then it is going to be difficult for them to service a loan of 14-15 percent,” he said.

“This is the kind of structural issue we are addressing now in a low inflation environment.”

“But if we had high inflation like in the past, then servicing a loan of 14-15 percent is not a challenge because nominal incomes are growing at 18-20 percent, so they can service that.”

The central bank cut rates in May 2019 without printing money but in August money was printed to push down rates.

The central bank has slapped price controls on deposits and is planning controls on lending rates.

Sri Lanka’s currency collapsed from 153 to 182 to the US dollar in 2018, which came quickly on top of another collapse from 131 to 150 in 2015/2018.

But inflation has not been as high as that experienced in the 1980s and in the run up to the burst US credit and commodity bubble in 2008.

Prices have been partly helped by relatively stable global commodity prices backed by better US policy, as well as tighter policy domestically in the form of liquidity shortages, analysts have said.

In Sri Lanka as well as other countries, bouts of money printing and currency collapses are usually followed by credit collapses. Similar credit slowdowns have occurred in the wake of currency collapses in 2008, 2012 and 2016.

So-called ‘Keynesian stimulus’ with deficit spending is advocated to counteract a private credit collapse which takes time to recover.

But in countries with pegged exchange rates, such spending, if accommodated with money printing, can lead to fresh collapses of the currency.

Analysts have pointed out that countries with monetary instability and currency collapses tend to have high nominal interest rates.

In Sri Lanka at one time budget deficits were blamed for high interests, but deficits have fallen in recent years.

In the first half of 2019, the budget deficit widened as revenues fell due to currency and credit collapse, as well trade restrictions slapped by the central bank in the course of operating a s-o-called ‘flexible exchange rate’ backed by conflicting money and exchange policies.

However up to June, most of the deficit had been filled by foreign borrowings.

In Sri Lanka deficits have also been blamed for high inflation, though in the absences of central bank accommodation (money printing) deficits simply crowd out private credit.

Alleged inefficiencies in the banking sector, and high margins have also been blamed for high interest rates.

Other analysts however have noted that countries with monetary instability and currency collapses tend to have high nominal interest rates and volatile inflation.

Countries with strong currencies and countries with central banks that follow consistent pegs or consistent floating rates, tend to have low nominal interest rates.

There have been calls for central bank to end monetary instability that has dogged the country for nearly 70 years since the soft-pegged central bank was set up. (Colombo/Sept06/2019)

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ADB USD200mn loan for Sri Lanka economic stabilization efforts

ECONOMYNEXT – The Asian Development Bank (ADB) has approved a US 200 million dollar concessional loan to Sri Lanka to help stabilize the country’s finance sector.

The Financial Sector Stability and Reforms Program comprises two subprograms of IS 200 million dollars each, according to a statement by the ADB.

“The program’s overarching development objective is fully aligned with the country’s strategy of maintaining finance sector stability, while ensuring that banks are well-positioned for eventual recovery,” ADB Country Director for Sri Lanka Takafumi Kadono was quoted as saying in the statement.

“The expected development outcome is a stable financial system providing access to affordable finance for businesses in various sectors of the economy.”

The ADB statement continues:

“Subprogram 1 targets short-term stabilization and crisis management measures that were implemented in 2023, while subprogram 2 is planned to be implemented in 2024 and focuses on structural reforms and long-term actions to restore growth in the banking sector.

The program will help strengthen the stability and governance of the country’s banking sector; improve the banking sector’s asset quality; and deepen sustainable and inclusive finance, particularly for women-led micro, small, and medium-sized enterprises.

According to the International Monetary Fund’s (IMF) latest review, Sri Lanka’s economy is showing tentative signs of stabilization, although a full economic recovery is not yet assured.

The program is a follow-on assistance from ADB’s crisis response under the special policy-based loan that was approved for Sri Lanka in May 2023.

It is aligned with the fourth pillar of the IMF’s Extended Fund Facility provided to Sri Lanka to help the country regain financial stability.

It is also in line with the government’s reform agenda, including strengthening the operational independence of the Central Bank of Sri Lanka (CBSL) and its designation as the country’s macroprudential authority.

In designing this subprogram 1 loan, ADB has maintained close coordination and collaboration with the IMF to design targeted regulatory reforms for the banking sector—including the asset quality review—and with the World Bank on strengthening the deposit insurance scheme.

“The loan is accompanied by a $1 million grant from ADB’s Technical Assistance Special Fund to provide advisory, knowledge, and institutional capacity building for Sri Lanka’s Ministry of Finance and CBSL.”

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Sri Lank in blackout as power grid hit by cascading failure

ECONOMYNEXT – Sri Lanka suffered a blackout as Saturday evening as the state-run Ceylon Electricity Board grid was hit by a cascading power failure.

The cascading failure is believed to have been triggered by the failure of the Kothmale-Biyagama transmission line.

“The Ceylon Electricity Board wishes to inform our customers that due to the failure of Kotmale – Biyagama main transmission line, an island wide power failure has occurred,” CEB Spokesman Noel Priyantha said.

“Step by step restorations are underway and it may take few hours to completely restore the power supply.”

With hydro plants running flat out, a outage of the line tends to create a big imbalance in the demand and supply, leading to tripping of more lines and generators.

Lines can trip due to lightening strikes, or equipment failures.

Sri Lanka last suffered a cascading failure in December 2021, due to the failure of the same transmission line.

RelatedSri Lanka power blackout as grid hit by cascading failure

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Sri Lanka to host regional Food and Agriculture Organization conference

ECONOMYNEXT – Sri Lanka will host the 37th session of the Asia Pacific Regional Conference (APRC) of the United Nations Food and Agriculture Organization (FAO), from February 19-22, 2024 in Colombo.

The Conference will bring together agriculture ministers and officials from 46 countries across the region to discuss challenges in food and agriculture.

“The 37th APRC will provide a vital platform for regional collaboration, benefitting the agricultural landscape, fisheries sector and environment of Sri Lanka,” Minister Mahinda Amaraweera said at a press briefing on Friday (8) to announce the conference.

FAO has had an active presence in Sri Lanka for over 40 years. “FAO has supported the country in the implementation of Good Agricultural Practices (GAP), and the development of the fisheries sector for growth and climate resilience,” Vimlendra Sharan, FAO Representative for Sri Lanka and the Maldives said.

“The APRC conference will be an opportunity to highlight the innovative approaches introduced in partnership with the government.”

By hosting APRC, Sri Lanka hopes to demonstrate the country’s dedication to the growth of sustainable agriculture, and showcase its commitment to sustainable agricultural development.

The APRC agenda will include a forum on agritourism, especially requested by the Sri Lankan government.

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