Govt. plans to bring down high market interest rates by 200bps

• PM appoints Working Group to recommend measures to bring down high interest rates
• Bank credit extended to private sector records marginal increase of Rs.7.6bn in Feb.

By Nishel Fernando 

As Sri Lanka’s bank credit extended to the private sector decelerated significantly in the first two months of the year, the government plans to bring down the high market interest rates by 200 basis points, to maintain private sector credit growth at 13.5 percent this year, to reach the anticipated 4 percent GDP growth.

Central Bank Governor Dr. Indrajit Coomaraswamy yesterday told reporters in Colombo that Prime Minister Ranil Wickremesinghe recently appointed a Working Group chaired by Central Bank Monetary Board member Nihal Fonseka to come up with specific measures to bring down the high interest rates, which have been recently ranked as the highest real interest rates in South Asia. 

The committee also consists of three bankers and two members of the Institute of Chartered Accountants of Sri Lanka. 

“They are looking at ways and means on how the margins between benchmark interest rate, treasury rate and deposit and lending rates can be reduced. The spread is far too large and it has led to high interest rates. They will come up with very specific ways in which the spread can be reduced,” Dr. Coomaraswamy said.

The report is scheduled to be submitted to the prime minister tomorrow.

Amidst high market interest rates, the growth of credit extended to the private sector decelerated during the first two months of 2019. The private sector credit recorded a repayment or a contraction of Rs.4.3 billion in January, followed by a marginal increase of around Rs.7.6 billion in February 2019.

However, the net credit to the government increased by Rs.156 billion during the first two months of 2019 while the credit to public corporations decreased by Rs.40.6 billion in the period.

The broad money (M2b) growth also decelerated to 11.4 percent year-on-year (YoY) in February and 11.5 percent in January, due to the slowdown in the private sector credit growth. The Central Bank expects private sector credit to grow by 13.5 percent this year to support the economic growth targets. Hence, Dr. Coomaraswamy said that private sector credit needs to grow at an average of Rs.75 billion per month for the rest of the year.He pointed out though the benchmark interest rates, the treasury rate has come down significantly this year, the deposit and lending rates have not come down simultaneously and in fact these rates are still on the rise.

Banking sector remains cautious to take new risks over sluggish economic outlook.

Amidst the build-up in non-performing loans (NPLs), the banking sector has also been forced to put more efforts in improving the assets quality rather than broadening its lending portfolios.Dr. Coomaraswamy acknowledged that delays over government payment for the construction sector worth of Rs.60-70 billion and Rs.40 billion arrears in senior citizen interest subsidy were some of key reasons for the recent build-up in NPLs in banking sector.

He noted that the government is already in the process of settling the payments for the construction sector and the government would settle the arrears in the senior citizen interest subsidy via a loan or issuing a bond. 

As the working group consists of three members from the banking sector, Dr. Coomaraswamy expressed his confidence that the committee would come up specific solutions to bring down the high interest rates, which are implementable. 

“There are some specific measures that bring us the confidence this time. Our objective is to get market lending deposit rates down by 200 basis points. It will also address the credit crunch that the SMEs are facing. That’s where the real crunch has come,” he said.In addition, the implementation of the International Financial Reporting Standard (IFRS) 9 and Basel III rules also put pressure on the banking sector.

Dr. Coomaraswamy said that the Central Bank will show some flexibility to the banking sector in terms of lending to the SME sector. However, he stressed that the Central Bank doesn’t intend to reverse the implementation of these standards. In terms of rupee liquidity, the Central Bank believes that there is sufficient liquidity in the market as the government has released over Rs.250 billion through two Statutory Reserve Ratio (SRR) cuts, reversal of margin requirements for vehicle imports and settlement of overdue payment to the construction sector. 
In addition, the recent salary and pension increase in the budget is expected to further increase the money supply. 

CB holds rates amid political pressure to cut rates to revive economy

The Monetary Board yesterday decided to hold its key rates at the current levels as maintaining price stability came in as the top item in the agenda ahead of providing stimulus to revive a hobbling economy for far too long. 

In its second meeting held yesterday, the executive board decided to leave the Standing Deposit Facility Rate or the rate at which the excess liquidity is mopped up, at 8.00 percent and the Standing Lending Facility Rate or the rate at which the liquidity is injected to the banking system, at 9.00 percent, just over a month after the same board decided to cut the banks’ reserve ratio by 100 basis points to release liquidity to the money market. The analysts and economists were divided over the possible action ahead of yesterday’s decision by the Monetary Board as some believed the Central Bank might cut rates at least by half a percent to provide assistance to the sluggish economy, while another set of people believed the rates to be left unchanged until the imbalances generated during the 2015/16 period is gradually settle. 

The economic growth in the fourth quarter last year came in at a astoundingly low 1.8 percent with the full-year growth coming in at an extremely modest 3.2 percent, compared to the revised 3.4 percent in 2017, well below the economy’s potential.

Meanwhile, the private sector credit sank by Rs.4.0 billion in January and February was no better. 

Last week First Capital Research placed a 50 percent probability of at least a 25 basis point cut in the standing lending facility rate at yesterday’s policy meeting to prop up the economic growth. The expectations for a rate cut was further heightened when the lawmakers last week nudged the bankers to cut their lending rates and accelerate lending to the small and medium enterprises in a bid to revive the animal spirits in the economy. The meeting held at the Prime Minister’s Office was also attended by Central Bank Governor Dr. Indrajit Coomaraswamy. The biggest contributor to yesterday’s policy decision was inflation, which showed some signs of uptick in recent months and the need for the Central Bank to maintain the inflation at the board’s desired range between 4 to 6 percent in 2019 and beyond under its inflation targeting monetary policy setting. Nevertheless the Monetary Policy statement did not completely rule out the possibility of a rate cut at a future meeting. “The board was also of the view that, if the current trends in global financial markets, trade balance and credit growth continue, policy interest rates could be reduced in the period ahead, given well anchored inflation and inflation expectations,” the statement added. 

In recent months however Sri Lanka’s rates across the board have shown some gradual downward movement and this was much apparent in the government securities yields which act as benchmark rates for all other financial assets.