An Echelon Media Company
Sunday December 10th, 2023

Sri Lanka orders 200bp cut in lending rates in new price controls

HIGH STRUCTURE: Analysts have warned that contradictory monetary and exchange policies that generates monetary instability permanent depreciation led to structurally high rates not just in Sri Lanka but other countries including China. Either a float or a peg backed by consistent monetary policy or a genuine float will lead to rates more in line with countries with complementary monetary policy.

ECONOMYNEXT – Sri Lanka’s central bank has slapped price controls on commercial banks loans, as credit contracted and bad loans soared after the agency generated monetary instability by controlling the exchange rate while printing money to simultaneously control interest rates in 2018.

Sri Lanka has elevated interest rates due to conflicts between money and exchange policies which have led to permanent depreciation of the currency, critics have said.

The central bank has ordered banks to cut lending rates by 200 basis points from October 15, 2015, from rates charged on April 2019 ‘subject to certain exclusions’.

Each licensed commercial bank has been ordered to cut its its Average Weighted Prime Lending Rate (AWPR) by 250 basis points by 27 December 2019 from the rate published by the central bank on April 2019.

“By 01 November 2019, each LCB’s AWPR must be at least 150 basis points lower than its AWPR as at 26 April 2019,”the central bank said.

Rates on credit cards which are not settled on the settlement day, will be controlled at 24 percent.

Penal rates on banks have been controlled at 400 basis points.

The central bank earlier slapped price controls on deposits

The current administration started in 2015 with then finance minister Ravi Karunanayake announcing a raft of price controls including in milk tea, which has now been extended to banks.

With Easter Sunday attacks adding to monetary instability growth fell to 1.6 percent in the the June 2019 quarter.

The 2018 monetary instability came with barely a year of monetary stability in 2017, which ended with cash injections that began around March 2018.

You may also read

Sri Lanka resorting to supreme idiocy of price controls

Sri Lanka caught in ‘fatal conceit’ of swinging away from markets

The full statement is reproduced below:

Communications Department

Enhancing Efficiency of the Transmission of Recent Policy Decisions to Market Lending Rates

Over the past eleven months, the Central Bank of Sri Lanka has taken a number of monetary and regulatory policy measures to induce a reduction in market lending rates. These measures include the reduction of the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points in two steps, the reduction of the Statutory Reserve Ratio (SRR) applicable on rupee deposit liabilities of Licensed Commercial Banks (LCBs) by 2.50 percentage points that released around Rs. 150 billion of additional liquidity to the financial market, and the imposition of caps on rupee deposit interest rates offered by licensed financial institutions that enabled them to reduce the cost of mobilising funds from the general public.

The Central Bank has taken these measures with a view to supporting economic activity, given well contained inflation and inflation expectations. Further slowdown observed in the economy following the Easter Sunday attacks has intensified the need for lower market lending rates.

Meanwhile, the growth of credit extended to the private sector has decelerated sharply since the beginning of this year, and the non-performing advances (NPAs) have grown due to various factors.

The Central Bank is of the view that, among these, excessively high nominal and real lending rates are a key reason for slowing credit expansion and rising NPAs.

In fact, Sri Lanka’s real lending rates are unacceptably high compared to its peer economies, and are not consistent either with the low inflation regime experienced by the country over the past 10 years and the expectations of 4-6 per cent level of inflation envisaged under the proposed flexible inflation targeting framework.

Accordingly, the Monetary Board decided to order the Licensed Banks under Section 104(1)(b) of the Monetary Law Act, No. 58 of 1949, as amended, to reduce interest rates applicable on all rupee denominated loans and advances by at least 200 basis points by 15 October 2019, in comparison to the interest rates applicable as at 30 April 2019, subject to certain exclusions.

With effect from 01 November 2019, in the case of credit card advances, the maximum interest rate applicable will be 28 per cent per annum, while in the case of pre-arranged temporary overdrafts, the maximum interest rates applicable will be 24 per cent per annum.

Penal interest rates added to loans and advances have been capped at 400 basis points per annum, for the amount in excess of an approved limit or in arrears, during the overdue period, with effect from 15 October 2019.

Each LCB is also expected to reduce its Average Weighted Prime Lending Rate (AWPR) by 250 basis points by 27 December 2019 compared to its AWPR as published by the Central Bank as at 26 April 2019. By 01 November 2019, each LCB’s AWPR must be at least 150 basis points lower than its AWPR as at 26 April 2019.

The Central Bank will continue to closely monitor the movements in market lending rates to ensure a more effective transmission of monetary policy through the financial system. The Central Bank also expects to review this Order at end March 2020.

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 *

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.”

Continue Reading

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

Continue Reading

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.

Continue Reading