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Sri Lanka cuts reserve ratio by 2.0-pct, injects Rs115bn into banks

Central Bank Governor W. D. Lakshman. Source: AFP

ECONOMYNEXT – Sri Lanka has cut the statutory reserve ratio (SRR) reducing the share of deposits that banks have keep in the central bank to 2.0 percent from 4.0 percent, releasing 115 billion rupees into the credit system.

The liquidity injection came hours after President Gotabaya Rajapaksa summoned Governor W D Lakshman and top officials to his office to give them a dressing down for not expanding a Zimbabwe style quasi-fiscal re-finance facility by 100 billion rupees to 150 billion rupees.

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“The financial sector is expected to pass the benefit of the high level of liquidity and the reduced cost of funds to the economy without delay, by increasing lending to businesses and households at low cost,” the central bank said.

“The Monetary Board will continue to monitor economic and financial market developments and will take further policy and regulatory measures to support a sustained revival of economic activity in the period ahead.”

The central bank said the SRR has been cut 200 basis points so far this year, policy rates have been cut 150 basis points and several other measures have also been taken.

The SRR is an archaic rule that needlessly raises the cost of funds of banks, but the liquidity injection comes at a time when Sri Lanka’s forex reserves are declining and the country has faced forex shortages and rating downgrade after earlier money printing and tax cuts.

The liquidity injected though the SRR cut is about 600 million US dollars at current exchange rate indicating that a similar amount of reserves would be lost to stop the fall of the rupee when the new money turns into credit.

Sri Lanka’s forex reserves had dropped by 1,032 million US dollars to 6,493 since rate cuts and money printing began from January 30.

Data showed that about 90 billion rupees of excess liquidity remained in the banking system from money printed in April and June, which could cost about 480 million US dollars to mop up in forex markets or allow the exchange rate to fall, unless they were mopped up through domestic operations.

President Rajapaksa slammed central bank officials saying they are getting high salaries but had failed to regulate finance companies and there had been a bondscam.

“All at the Central Bank are economic specialists drawing very high salaries,” he said hours earlier. “You have a responsibility. I have presented you a mechanism.

“If you are unable to follow it, present me your version of the mechanism by tomorrow morning.”

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The full statement is reproduced below:

The Central Bank of Sri Lanka Further Reduces
the Statutory Reserve Ratio

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 16 June
2020, decided to reduce the Statutory Reserve Ratio (SRR) applicable on all rupee deposit
liabilities of licensed commercial banks (LCBs) by 200 basis points to 2.00 per cent, with
effect from the reserve maintenance period that commenced on 16 June 2020. This reduction
in the SRR injects around Rs. 115 billion of additional liquidity to the domestic money market,
enabling the financial system to expedite credit flows to the economy, while reducing the cost
of funds of LCBs.

With today’s decision, the Central Bank has reduced the SRR by a total of 300 basis
points thus far during 2020, in addition to several other easing measures implemented already,
including the reduction of policy interest rates by a total of 150 basis points and the reduction
of the Bank Rate by 550 basis points.

The financial sector is expected to pass the benefit of the high level of liquidity and
the reduced cost of funds to the economy without delay, by increasing lending to businesses
and households at low cost.

The Monetary Board will continue to monitor economic and financial market developments and will take further policy and regulatory measures to support a sustained revival of economic activity in the period ahead.

(Colombo/June16/2020)