Sri Lanka troubled firms will get CRIB relief, 18-month debt freeze: Cabraal

ECONOMYNEXT – Borrowers from banks in Sri Lanka in difficulties will get an 18-month debt moratorium and a credit default agency will be reformed to allow new loans to be taken, if Gotabaya Rajapaksa is elected president, ex-Central Bank Governor Nivard Cabraal said.

“We will reform the CRIB,” Cabraal told a forum in Colombo, organized by a group supporting the Rajapaksa campaign.

“We will bring some re-structuring systems so that people who have shown good results, but have had difficulties repaying their loans as a result of the current downturn in the economy, are given some protection.”

“We want to give a moratorium as far as loans are concerned, not to not pay the loan. Please do not get me wrong. You’ve got to pay your loan back.

“But what we will do is freeze your loans so that you will only pay interest and banks will not get into trouble and you will get some relief so that some capital will remain with you.”

Sri Lanka’s bad loans are spiking in 2019, after the country’s forex reserve collecting soft-peg, labeled a ‘flexible exchange rate’ collapsed in 2018 amid several liquidity injections made to bring down rates as the credit system recovered. It was worsened by a political crisis which worsened capital flight.

The rupee fell from 153 to 182 to the US dollar during 2018.

Soft-pegs collapse when a central bank prints money or injects liquidity (to target interest rates) while trying to a defend a peg. In 2015/2016 the rupee collapsed from 131 to 150 as large liquidity injections were made to keep rates down.

To end a complete collapse of the currency rates then have to go up to levels higher than if rates were allowed to be market determined in the first place.

Analysts and economists have called to reform Sri Lanka’s central bank to stop frequent currency crises.

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High performing East Asia pegs were maintained for decades through currency boards or currency board-like systems, though they were hit in 1997.

Cabraal said the rupee had fallen 50 rupees from 2015 to 2018.

“We have got to ensure that the rupee is stable,” Cabraal said. “The rupee fell from 150 to 180 (to the dollar) in one year – 30 rupees. In the entire 9 years I was governor the depreciation was only 30 rupees. But in one year last year we had that shock.

“When you have a huge disparity in a short period people cannot adjust to it. Then your businesses start getting into trouble.”

Cabraal said Sri Lanka’s interest rates were too high and that has to be brought down. It “was easier said than done’ but during his time interest rates were lower he said.

Economic analysts have pointed out that countries that does not have a consistent monetary regime, either a peg backed by complementary policy or a genuine floating rate with an inflation target will tend to have structurally higher interest rates. (Colombo/Oct26/2019)

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