An Echelon Media Company
Friday February 23rd, 2024

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)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lankans may need to wait for Monetary Board meeting minutes despite new Act

ECONOMYNEXT – Sri Lankans may have to wait more time to read the meeting minutes of the Central Bank’s Monetary Board, a top official said, despite a new act that has made the central bank to be more transparent and accountable for its decisions.

Many central banks including the United States’ Federal Reserve, India’s Reserve Bank, and Bank of Mexico release the minutes of their monetary policy meeting to ensure transparency.

The new Central Bank Act passed by the Parliament in line with the guidance by the International Monetary Fund (IMF) includes measures for Sri Lanka’s central bank to be more transparent and accountable.

These measures include releasing the Monetary Policy Report every six months and the first such report was released on February 15.

However, the central bank has not taken a decision to release the minutes of the Monetary Board meetings on the monetary policy.

“Going forward, one day this could happen,” Chandranath Amarasekara, Assistant Governor at the Central Bank told reporters on Wednesday (21) at a media briefing.

“Right now, we have just started working on the new Central Bank Act. We are not there yet. There is no such decision on releasing minutes yet.”

The central bank in the past printed billions of rupees to keep the market interest rates artificially low and provide cheap funding for successive governments to propel a debt-driven economy.

It’s decision, however, led Sri Lanka into an unprecedented economic crisis in 2022 with sovereign debt default.

It also propped up the rupee currency artificially in the past to maintain a stable exchange rate at the expense of billions of US dollars. The move also contributed for the economic crisis and later the central bank was forced to allow over 60 percent depreciation in the rupee in March 2022.

However, none of the top central bank officials was held responsible for wrong decisions to hold interest rates artificially low with money printing and propping up the rupee. (Colombo/Feb 23/2024)

Continue Reading

Amid mass migration, Sri Lanka to recruit volunteers as English teachers

ECONOMYNEXT- Sri Lanka is planning to appoint foreign and expatriate volunteers to teach English for Sri Lanka students, the Ministry of Higher Education said, amid thousand of teachers migrating to other countries after the island nation’s unprecedented economic crisis.

Over five thousand teachers have left the country with the Education Ministry permission using the government’s circular of temporarily leaving state jobs while tens of thousands of teachers have left the country without informing the relevant authorities, Education Ministry officials say.

That had led to an acute teacher shortage in the country.

Suren Raghavan, the State Minister for Higher Education said the shortage has aggravated because most of the graduates who have an English degree become writers and join the private sector due to higher salary.

“They do not join government schools. This is a problem all over the country which is why we need to have an online system,” Raghavan told EconomyNext.

Separately he said on Thursday at a press conference that he had spoken to Canadian and Australian High Commissions to get the assistance of where their English teachers who have experience in teaching English as a second language in South Asia.

He also said that there is a number of teachers in the Unite Kingdom have shown interest in teaching English and they have experience in teaching in other Asian countries such as Burma and India while the teaching would be done free of charge.

The new move also comes at a time when the country’s English literacy rate is on the decline, according to the Minister.

President Ranil Wickramasinghe announced the English-for-all initiative three months ago with plans to improve English literacy at school and university level. (Colombo/Feb 23/2024)

Continue Reading

Sri Lanka tea production up 1.4-pct in Jan 2024, exports up 6.8-pct

ECONOMYNEXT – Sri Lanka’s tea production was up 1.4 percent to 18.73 million kilograms in January 2024, with high growns falling and low and mid growns rising, industry data shows.

High grown tea in January 2024 was 3.56 million kilograms, down from 3.36 million, medium growns were 2.6, up from 2.5 million kilograms and low growns were 12.56 million, up from 12.32 million kilograms last year.

Exports, including re-exports were up 6.88 percent to 18.76 million kilograms, industry data published by Ceylon Tea Brokers show.

Export earnings were reported at 102 million US dollars, up from 99.5 million dollars last year. The average FOB price was 5.45 US dollars a kilo down from 5.67 dollars last year.

Tea in bulk was 8.5 million kilograms valued at 12.79 billion rupees, tea in packets was 7.8 million kilograms valued at 13.1 billion rupees and tea in bags was 1.8 million kilos, valued at 5.06 billion rupees.

The top buyer was Iraq with 2.5 million kilos, up from 2.1 million last year followed by the UAE with 1.99 kilos, up from 1.86 million last year.

Russia bought 1.98 million kilos, down from 2.0 last year, Turkey bought 1.72 million kilos, from 2.3 million last year, while Iran bought 1.32 million, up from 614 million last year. (Colombo/Feb23/2024)

Continue Reading