Sri Lanka to set up national development bank for subsidized credit

ECONOMYNEXT – Sri Lanka will set up a ‘national development bank’ to give long term subsidized credit to construction, agriculture and small and medium enterprises, the government said in a five year policy document.

The ‘National Development Bank will encourage import-export trade, construction industry, SME and agriculture through long-term loans at concessionary interest rates, the policy document said.

Sri Lanka has high interest rates due to monetary instability coming from a depreciating soft-pegged exchange rate, analysts have said.

Sri Lanka set up a DFCC under World Bank advice in 1955 and also set up the current NDB Bank as a National Development Bank in the post-1978 re-opening of the economy.

Sri Lanka also gave central bank re-financed rural credit, which contributed to further monetary instability, inflation and high interest rates in the 1980s.

Korea in its post World War II period also gave subsidized credit as its inflation shot up and the currency collapsed.

Japan however quickly closed its reconstruction bank (fukkin) after a US advisor Josepsh Dodge who came from Germany advised the government that Bank of Japan re-finance of the agency was responsible for inflation and currency troubles.

Dodge fixed the yen at 360 to the dollar and the country, which held until the break-up of the Bretton Woods in 1971-3. It has since appreciated to around 110.

Other countries in East Asia that did not print money to keep rates down, including Singapore, Malaysia, Hong Kong and Thailand also had low interest rates.

Korea achieved monetary stability in the early 1980s and China in 1993. (Colombo/Dec16/2019)