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Friday February 23rd, 2024

Sri Lanka loan rate ceilings credit positive, Moody’s mistaken: Central Bank

ECONOMYNEXT – Sri Lanka’s central bank disputed an analysis by Moody’s Investor Service, a rating agency which said price controls slapped by the regulator will be credit negative for banks.

Sri Lanka has reduced the reserve ratio, where banks are required to keep part of the deposits inside the central bank by 2.5 percent releasing 150 billion rupees in resources.

The central bank had previously slapped price controls on deposits, which were lifted in September.

The price controls came after monetary instability in 2018, triggered by the central bank targeting both the exchange rate and the call money rate at the same time defying basic principles of economics, through what is called a ‘flexible exchange rate’ pushed rates up.

The regulator claimed there was ‘unhealthy’ competition for deposits implying that price controls were to ‘correct’ it.

With the lower reserve ratio and money market rates, lower policy rates and deposits rates as well as time given for banks to cut lending rates, the central bank said it had sought to minimised the disruption to banks.

Holding other factors constant, the central bank said it does not expect a material change in interest margins of banks.

“Furthermore, more realistic nominal and real lending rates are expected to stimulate economic activity gradually, thereby boosting the demand for credit,” the regulator said.

“This, along with improved repayment capacity of borrowers at lower interest rates, will help strengthen licensed banks, going forward, including by addressing the challenge of rising NPLs.

“Therefore, the Central Bank is of the view that the imposition of caps on lending rates of licensed banks would, in fact, be credit positive, contrary to the view held by Moody’s Investors Service.”

The full statement is reproduced below:

On 27 September 2019, Moody’s Investors Service issued a Sector Comment on Sri Lankan banks titled “Sri Lanka’s lending rate cut is credit negative for banks.” In this respect, the Central Bank of Sri Lanka is of the view that the conclusion by Moody’s has not taken into account the complete information set, and is therefore unfounded.

The Central Bank of Sri Lanka has taken a number of measures over the past eleven months to ease monetary policy and monetary conditions in view of decelerating growth of credit and monetary aggregates and subdued economic growth, amidst well anchored inflation expectations.

Amongst these measures, the reduction in the Statutory Reserve Ratio (SRR) by 2.50 percentage points in two steps has enabled licensed commercial banks (LCBs) to invest additional funds amounting to around Rs. 150 billion in revenue generating activities.

The reduction in SRR has also improved rupee liquidity in the domestic money market, while a further reduction in money market interest rates has been effected by reducing policy interest rates by 100 basis points in two steps in May and August 2019.

The imposition of caps on deposit interest rates of licensed banks in April 2019, which was subsequently removed in September 2019, was aimed at limiting unhealthy competition in deposit mobilisation amongst banks and assisting them to reduce lending interest rates.

This temporary cap imposed in consultation with banks helped reduce the Average Weighted New Deposit Rate (AWNDR) by 284 basis points within four months since end April 2019.
However, in spite of continued deliberations with banks, most market lending interest rates have been downward rigid, unlike deposit interest rates as well as rates on short term funds and government securities.

It is in this context that the Central Bank imposed caps on lending rates of licensed banks on 24 September 2019.

With the substantial decline in cost of funds, in terms of lower SRR, lower money market interest rates, lower policy interest rates and lower deposit interest rates, along with the allowance of sufficient time for banks to adjust lending rates downwards, the Central Bank has sought to minimise any disruption to the smooth operation of the banking system as well as its profitability.

The Central Bank does not expect a material change in interest margins of the banking system arising from the imposition of caps on lending rates, holding other factors constant. The Central Bank has also announced its intention to review this action by March 2020.

Furthermore, more realistic nominal and real lending rates are expected to stimulate economic activity gradually, thereby boosting the demand for credit.

This, along with improved repayment capacity of borrowers at lower interest rates, will help strengthen licensed banks, going forward, including by addressing the challenge of rising NPLs.
Therefore, the Central Bank is of the view that the imposition of caps on lending rates of licensed banks would, in fact, be credit positive, contrary to the view held by Moody’s Investors Service.

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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)

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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)

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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)

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