ECONOMYNEXT – Sri Lanka’s hundreds of thousands of Senior Citizens who have invested their lives’ savings in Fixed Deposits and are living on the interest will take a “huge hit” when bank rates plunge after the government’s move to increase liquidity in the market economists say
At the behest of President Gotabaya Rajapaksa, the Central Bank of Sri Lanka (CBSL) halved the Statutory Reserve Ratio or the share of deposits commercial banks must keep with the central bank from 4 to 2 per cent.
This released over 100 billion rupees into the banking system, which already had 90 billion rupees of excess liquidity a day earlier.
This means the country’s excess liquidity in money markets has soared to a historic high of 223 billion rupees.
Former Deputy Governor of the Central Bank W A Wijewardene tweeted that this move will have multiple repercussions “such as depositors getting less.”
Investment Guru Ravi Abeysuriya predicts that interest rates will plunge as the government wants to make credit cheaper.
“Investors can only get 8 or 9 per cent on their Fixed Deposits at Commercial Banks today, which is a 3 to 4 per cent reduction from the rates that prevailed one year ago and FD rates could go down further,” he warns.
These will be the rates that will come into effect at renewals of current deposits he predicts.
He pointed out that in developed countries interest on deposits are either zero or negative.
Asked the question at the Cabinet Press conference this morning the Cabinet Spokesman Media Minister Bandula Gunewardene said that the aim of the government is to bring interest rates to single digits.
“Look at the developed countries of the world, nobody is paying double-digit interest,” he told reporters.
Abeysuriya says that the reason the government has to bring interest rates down is because it needs to cater to the business community which is asking for moratoriums on loan payments as well as interest.
Gunewardene says many Small and Medium-scale Enterprises are owed large sums of money by the government for work they have carried out during the last administration.
“We need to pay them, and that will bring more cash into circulation,” he said.
Abeysuriya also says with lots of cash chasing the same amount of goods, inflation is bound to rise.
Senior citizens he warns could be dealt a double whammy as “medicines and other healthcare costs will also rise.”
Opposition politician Dr Harsha de Silva, an economist by training, says that as inflation increases there will be pressure on the currency.
“The government has banned imports but that is having other repercussions,” he claims.
The import of motorcycles for instance he says has been banned, “with Public transport seen as unsafe, some people want to buy motorcycles.”
Another opposition politician former Minister Ajith P Perera said that the actions of the government have caused the value of retirees deposits to disappear.
“This is money they have deposited after withdrawing their EPF and ETF or selling their properties,” he told reporters today at the headquarters of the Samagi Jana Balavegaya.
“It’s the small guy who has got hit,” Perera said. (Colombo, June 18, 2020)