Sri Lanka extends Central bank re-financed Covid-19 credit relief deadline to May 15

ECONOMYNEXT – Sri Lanka has extended a deadline for Coronavirus credit relief for Coronavirus affected businesses from a central bank re-financed fund till May 15, 2020, from an original April 30, the central bank said.

“Considering the difficulties faced by some customers of financial institutions affected by the COVID-19 pandemic to obtain certain relief measures, the Central Bank of Sri Lanka has extended the deadline..”, the agency said.

The central bank has also asked banks to clear expired cheques the validity period of cheques of less than 500,000 to May 15.

Sri Lanka’s central bank said it is setting up a 50 billion rupee facility financed with printed money (central bank re-finance) to fund Covid-19 hit businesses.

Sri Lanka stopped giving credit through central bank re-finance in the mid-1990s after the re-open-economy after 1978 was de-railed by high inflation and currency depreciation due to central bank finance of the budget and rural credit.

Similar central bank re-finance finds were also used by the Reserve Bank of Zimbabwe to generate hyper inflation.

The RBZ set up a Productive Sector Facility (PSF) and Agricultural Sector Enhancement Facility (ASPEF) about 15 years ago as well as a fund for state enterprises, triggering severe foreign exchange shortages.

It also set up another central bank re-finance fund called the Parastals and Local Authorities Re-orientation Program (PLARP).

The country was eventually driven into dollarization and currency competition by these programs as well as well as lender of last resort operations, which the RBZ was unable to sterilize.

In Sri Lanka under the current monetary framework open market operations are unsterilized by design under a so-called call-money-targeting-with-excess-liquidity, analysts have pointed out, leading to swift balance of payments troubles.

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The International Monetary Fund has also warned that central banks that print money will face forex shortages and will have to impose exchange controls.

Sri Lanka has already tightened some exchange controls and closed the stock market, though bond markets are open.

IMF has said that central banks in emerging markets should consider using their balance sheets together with the government to guarantee credit.

“For emerging markets with a limited fiscal space, they might need to consider how to use central bank balance sheets flexibly to help small and medium enterprises through risk sharing with the government,” IMF’s Asia Pacific Director Changyong Rhee said. (Colombo/May15/2020)

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