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Sunday December 10th, 2023

Sri Lanka loan price controls to hurt banks: Moody’s

ECONOMYNEXT – Sri Lanka’s price controls on lending rates, which comes in the wake of a currency collapse and a spike in bad loans, will hit banks whose profits are already under pressure, Moody’s a rating agency said.

Sri Lanka’s soft-pegged central bank, which generated yet another currency collapse in 2018, due to contradictory money and exchange policies (juggling with domestic and external anchors) in a state failure, has slapped price controls claiming a ‘market failure’ critics say.

Up to 200 basis points in lending rate cuts were ordered.

“The lower lending rates will compress Sri Lankan banks’ net interest margins (NIMs) and add to their existing profitability challenges,” Moody’s Investors’ Services said.

“Narrower margins will strain bank profitability, which is already weakened because of rising credit costs and a higher effective tax rate.”

Currency collapses are coming thick and fast after the monetary authority started operating a highly unstable peg labeled ‘flexible exchange rate’ with discretionary policy where both money (liquidity management, rates) and exchange policies (convertibility undertakings) are skewed to permanently depreciate the rupee, analysts have noted.

Central bank driven ani-market interventions and monetary instability is coming as Sri Lanka’s foreign debt is inflating rapidly due to currency collapses and the country is running out of a stable environment for economic agents to engage in growth generating activity.

Currency collapses have come in 2008/2009, 2012 in 2015/2016 and after only a one year gap in 2018 under the ‘flexible exchange rate’.

After the 2015/2016 currency collapse there was only a one year respite of monetary stability in 2017.

By March 2018 the central bank started injecting liquidity (printing money) to generate another period of instability just as the credit system was recovering from the previous instability.

Prudent policy again reversed after July 2019 generating another period of instability, through private credit is weak, reducing the risk of another balance of payments crisis analysts have said. However with a fall in revenues from the 2018 currency collapse and credit contraction, there are risks of rising state credit.

Gilt yields have edged up, partly due to monetary instability and spooked foreign investors in rupee bonds.

The central bank earlier cut lending rates effectively expropriating depositors on a formula based on gilt yields. However

The Moody’s statement is reproduced below:

Sri Lanka’s lending rate cut is credit negative
for banks

On 24 September, the Central Bank of Sri Lanka (CBSL) mandated commercial banks
to cut lending rates on all Sri Lankan rupee-denominated loans by at least 200 basis
points beginning 15 October from rates set on 30 April 2019.

We expect banks’ NIMs to narrow after the lending rate cut since the cut’s immediate effect
more than offsets a more gradual decline in funding costs because of the time lag in the
re-pricing of time deposits. Narrower margins will strain bank profitability, which is already
weakened because of rising credit costs and a higher effective tax rate.

Among the three rated banks in Sri Lanka – Bank of Ceylon (BOC, B2 stable, b21), Hatton
National Bank Ltd. (HNB, B2 stable, b2) and Sampath Bank PLC (B2 stable, b2) – we expect
the negative effect on margins and profitability will be more pronounced for BOC because its
asset yields are lower than those of the other two banks (see exhibit). Furthermore, a modest
NIM reflects BOC’s already weak profitability, while its poor asset quality has contributed to
high credit costs.

Sri Lankan banks’ credit costs have increased substantially since 2018 because of systemwide
deterioration in asset quality amid weaknesses in the agriculture and construction sectors.
The country’s weak operating conditions following a constitutional crisis and the 2019 Easter

Sunday terrorist bombings that killed 259 people exacerbated banks’ profitability challenges. In addition, the government introduced a temporary debt repayment levy in October 2018 that raised banks’ effective tax rate to more than 50% from 2019-21, further weighing on the banks’ bottom line.

With the lending rate cut, the central bank aims to stimulate economic activity and boost credit growth, which the country’s weak economy has dampened.

The central bank’s move comes amid an accommodative monetary policy in the past year, which did not lead to a reduction in lending rates. Since late 2018, the CBSL has adopted several measures to lower lending rates through a combination of lower reserve requirements, policy rate cuts and the introduction of a cap on deposit rates, which the CBSL removed shortly after the lending rate cut.

The CBSL also mandated that banks reduce the average weighted prime lending rate by 250 basis points by 27 December 2019 from rates as of 26 April 2019. The CBSL also introduced several other measures to curb lending rates, including a ceiling on rates charged on credit card advances, prearranged temporary overdrafts and penalty interest rates.

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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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