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Tuesday November 29th, 2022

Sri Lanka to offer leeway on new regulations for small banks, finance companies

ECONOMYNEXT- Sri Lanka’s central bank is offering breathing space for small and medium sized banks and non-bank finance companies to comply with new regulations, Governor Indrajit Coomaraswamy said.
Sri Lankan banks have to meet higher capital adequacy ratios under BASEL III regulations, while both banks and finance companies have to provision for bad loans on expected loss instead of incurred cost under International Financial Reporting Standards (IFRS) 9.
"The implementation of BASEL III and IFRS 9 together is also imposing certain burns on banks," Coomaraswamy told reporters on April 08.
"It’s not in banks’ interests or central bank’s interest or country’s interest to reverse what we’ve done."
"Sri Lanka has a good achievement in reaching global standards, but there seems to be leeway, room, to fine tune these things to address some problems," he said.
Bad loans have increased rapidly over the past year, which is cause for concern, Coomaraswamy said.
He said small and medium sized banks and finance companies facing difficulties with bad loans and meeting capital requirements could apply for flexibility in meeting the regulatory minimums.
"We don’t want to reverse the whole process , but individual banks facing difficulty can make an application."
"If they are given some forbearance, there will be some conditions attached to them," Coomaraswamy said.
Conditions could include dividend policies, among others, the governor said.
Coomaraswamy then termed the new stance as offering flexibility, and not regulatory forbearance.
"It’s not really forbearance but offering leeway."
The central bank has also been increasing minimum capital requirements for banks and finance companies in a bid to trigger mergers. 
In January 2019, Coomaraswamy had said that the regulator will not offer any forbearance for banks and especially, finance companies, which would even face early interventions. (Colombo/Apr09/2019)

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A new Sri Lanka monetary law may have prevented 2019 tax cuts?

ECONOMYNEXT – A new monetary law planned in 2019, if it had been enacted may have prevented the steep tax cuts made in that year which was followed by unprecedented money printing, ex-Central Bank Governor Indrajit Coomaraswamy said.

The bill for the central bank law was ready in 2019 but the then administration ran out of parliamentary time to enact it, he said.

Economists backing the new administration slashed taxes in December 2019 and placed price controls on Treasuries auctions bought new and maturing securities, claiming that there was a ‘persistent output gap’.

Coomaraswamy said he keeps wondering whether “someone sitting in the Treasury would have implemented those tax cuts” if the law had been enacted.

“We would never know,” he told an investor forum organized by CT CLSA Securities, a Colombo-based brokerage.

The new law however will sill allow open market operations under a highly discretionary ‘flexible’ inflation targeting regime.

A reserve collecting central bank which injects money to push down interest rates as domestic credit recovers triggers forex shortages.

The currency is then depreciated to cover the policy error through what is known as a ‘flexible exchange rate’ which is neither a clean float nor a hard peg.

From 2015 to 2019 two currency crises were triggered mainly through open market operations amid public opposition to direct purchases of Treasury bills, analysts have shown.

Sri Lanka’s central bank generally triggers currency crises in the second or third year of the credit cycle by purchasing maturing bills from existing holders (monetizing the gross financing requirement) as private loan demand pick up and not necessarily to monetize current year deficits, critics have pointed out.

Past deficits can be monetized as long as open market operations are permitted through outright purchases of bill in the hands of banks and other holders.

In Latin America central banks trigger currency crises mainly by their failure to roll-over sterilization securities. (Colombo/Nov29/2022)

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Sri Lanka cabinet clears CEB re-structure proposal: Minister

ECONOMYNEXT – Sri Lanka’s cabinet has cleared proposals by a committee to re-structure state-run Ceylon Electricity Board, Power and Energy Minister Kanchana Wijeskera said.

“Cabinet approval was granted today to the recommendations proposed by the committee on Restructuring CEB,” he said in a message.

“The Electricity Reforms Bill will be drafted within a month to begin the unbundling process of CEB & work on a rapid timeline to get the approval of the Parliament needed.”

Sri Lanka’s Ceylon Electricity Board finances had been hit by failure to operate cost reflective tariffs and there are capacity shortfalls due to failure to implement planned generators in time. (Colombo/Nov28/2022)

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Sri Lanka new CB law to cabinet soon as IMF prior action

ECONOMYNEXT – Sri Lanka’s new central bank law will be submitted to the cabinet as a prior action of International Monetary Fund with clauses to improve governance and legalize ‘flexible’ inflation targeting, Central Bank Governor Nandalal Weerasinghe said.

Under the new law members of the monetary board will be appointed by the country’s Constitutional Council replacing the current system of the Finance Minister making appointments.

“It will be a bipartisan approach,” Governor Weerasinghe told an investor forum organized by CT CLSA Securities, Colombo-based brokerage.

“The central bank’s ability to finance the budget deficit will be taken out. Thirdly the flexible inflation targeting regime will be recognized in the law as the framework.”

The law will also make macro-prudential surveillance formally under the bank.

There will be two governing boards, one for the management of the agency and one to conduct monetary policy.

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