Friday, 10 July 2020 06:25

CB slashes rates to spur 2H growth

Putting its main focus on ensuring a growth rebound in the second half, the Central Bank yesterday reduced rates by 100 basis points and called on banks to ensure the market rates are slashed rapidly, to boost consumption and keep the economy on target to achieve 1% to 1.5% growth in 2020.

Central Bank Governor Prof. W.D. Lakshman told reporters that the Monetary Board had unanimously decided to reduce rates, its fourth such effort this year, as the priority was to promote growth which has been severely impacted by the COVID-19 outbreak. He recapped the numerous steps taken by the Central Bank to reduce rates and regulatory measures on banks and finance companies to enable them to provide relief to consumers since March, and called for banks to pass on these rate reductions to the public as swiftly as possible.

Accordingly, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank was reduced by 100 basis points each to 4.50% and 5.50%, respectively. This will essentially result in all lending rates reaching single digit levels, Central Bank officials assured.

“The Monetary Board wishes to strongly reiterate that all financial institutions led by licensed commercial banks (LCBs) must pass on the full benefit of the cumulative reduction of 250 basis points in policy interest rates thus far during the year without delay. LCBs are also expected to release to the private sector borrowers the enhanced levels of liquidity effected by the reduction of the Statutory Reserve Ratio (SRR) by 300 basis points thus far during the year, which has also reduced the cost of funds of banks.”

“Such additional liquidity must be used to lend to productive sectors of the economy, along with concessionary credit schemes already announced by the Central Bank, to help needy sectors of the economy. The Central Bank will continue to monitor domestic and global macroeconomic and financial market developments, and take further measures to ensure that the intended outcomes of already implemented policies are realised,” the Governor added.

Despite high levels of surplus liquidity available to banks, credit extended to the private sector contracted significantly in May 2020. Growth of credit to the private sector, which continued to pick up since December 2019, dropped in May 2020 to 6.4% (from 7.6% in April). On a cumulative basis, credit to private sector increased only by Rs. 89.9 billion during the first 5 months of 2020, data from the Central Bank showed.

Senior Deputy Governor Dr. Nandalal Weerasinghe, explaining the reasons as to why relief may be taking time to filter to companies, noted that private sector credit was yet to pick up after the COVID-19 slump, and volumes of small and medium enterprises (SMEs) were small in comparison to other segments of the economy. He also said that banks were conscious of recouping their costs, and were therefore making careful evaluations.

He went onto express optimism that Sri Lanka will see a strong rebound in the second half, even though the latest rate reduction was made before the monetary authority had a chance to evaluate first quarter growth numbers, which are yet to be released by the Census and Statistics Department. Central Bank officials and other experts have predicted that Sri Lanka slipped into an unavoidable recession in the second quarter, due to the curfew causing a suspension of most economic activity. However, the Central Bank remains optimistic that Sri Lanka can reach the 1.5% growth target set out in its Annual Report, but acknowledged that given the uncertain global situation created by COVID-19, growth projections could be revised if necessary.

Prof. Lakshman emphasised that in order for Sri Lanka to post sustainable growth, it must focus on reforms, and that monetary policy-based relief was at best a medium-term support system. He also noted that if these were achieved, the recent World Bank categorisation change, which removed Sri Lanka from upper-middle income status and placed it back in the lower-middle income group, could be reversed. He also stressed that such labels were of “symbolic value”, and did not always reflect ground realities.

He also conceded that there were adverse impacts to reducing interest rates, such as reduced ability to attract foreign investors into Government securities, but reiterated that domestic growth remained the priority. Prof. Lakshman pointed out that despite an uptick in inflation expected in the next couple of months, inflation expectations remained well-anchored, and even though there was liquidity in the system, there were no signs that the economy was in danger of overheating. Central Bank Senior Deputy Governor Dr. Nandalal Weerasinghe also echoed these sentiments, and reiterated that it was the duty of the Central Bank to support the Government and the country at a time of unprecedented stress. He also insisted that the Central Bank has the necessary instruments to mop up excess liquidity if the need arises.

Responding to questions on the recent public berating dished out by President Gotabaya Rajapaksa to Central Bank officials, and whether that was an infringement of the institution’s independence, Prof. W.D. Lakshman defended his colleagues, and said that measures were already underway to provide relief before the fateful meeting.

“Before the meeting with the President, at least three rounds of meetings had already been held, and measures were being put in place under the legal mandate allowed to the Central Bank. Officials had already decided that under these provisions the Central Bank could give a refinancing facility and a rate adjustment had already been decided on. It was during this process that we had a meeting with the President,” the Governor explained.

When asked whether the President had asked for an update on what the Central Bank was doing before expressing his opinions, Prof. Lakshman said, “No, there was no request for details of what we were doing. I feel that perhaps it would have been better if there had been such a question directed at us first.” The Governor also said that following the episode, he had reached out to the necessary officials, and established a system whereby he could personally meet with President Rajapaksa and Prime Minister Mahinda Rajapaksa to give periodic updates on the Central Bank’s activities, to prevent such an incident occurring again.

“There are many definitions of independence in relation to Central Banks, but my personal view is that the Central Bank is an institution linked to the Government structure and it is part of the State. This is the reality.”


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