CB denies claims that primary cause for small and medium enterprise pains is higher rates

• Presents data to show only 5% of total business cost comes from interest 

Further defending its argument to stay firmly on higher rates for longer, the Central Bank offered data to provide evidence as to why a reversal of the interest rate policy prematurely wouldn’t necessarily help businesses, instead would make things worse for them. 

There has been a drumbeat of calls, specially from small and medium business owners to cut rates to ease business conditions, as they cited debt servicing cost as a major drag on their ability to stay afloat. 

However, the Central Bank pointed out that the finance cost accounts for only 4 to 5 percent of the total cost of a business, which in extreme cases may go up to 7 to 8 percent and the entirety of the balance cost comes from areas such as raw materials, transport, salaries and other overheads, which go into running a typical business.  Hence, the Central Bank officials asked what difference it makes by cutting rates, which would only provide businesses with a temporary relief on their 5 percent of the cost, when 95 percent of their cost is spiralling out of control, if runaway inflation is not addressed.  

“I have heard some of the small and medium enterprise owners have made certain comments that they are unable to do business due to (higher) interest rates,” said Central Bank Governor Dr. Nandalal Weerasinghe. 
“If you see their total business cost, finance cost accounts for around 4 to 5 percent or may be up to 7 to 8 percent the most,” he added. 

There has been a false notion that lower rates necessarily help businesses and prop up growth, causing inflation to take care of itself.

Turkey offers a classic example where its Central Bank policy, which is compromised by its President Recep Tayyip Erdoğan, keeps on cutting rates in an attempt to boost economic growth while its inflation is rising to multiyear highs and currency gets pummelled badly. 

In September, Turkey’s consumer inflation reached 83 percent, a 24-year high, while ‘lira’ trades at record lows.   
Recently, former United States Treasury Secretary Larry Summers, who accurately predicted the current bout of hot inflation in the US since last year, said Turkey offers a living example of a country that practices modern monetary theory. 

“President Erdogan is the world’s first practical modern monetary theorist,” he said speaking to Bloomberg TV after Turkey surprised the world by cutting its interest rates in August.  

“He is putting modern monetary theory into effect. So far it hasn’t worked very well for him or for the Turkish people. I don’t think that’s going to turn around,” he added.  Sri Lanka is also coming from a failed two-year experiment of the modern monetary, when the rates were cut to record low levels and the Central Bank printed trillions worth of money to finance blowout budget deficits in 2020 and 2021, imploding the economy at the end, firing 70 percent inflation while sending the rupee into a free fall. 

“So, if the SMEs think by cutting the finance cost by a half, it will ease their business cost, they should keep in mind that what falls to half is the 5 percent but the balance 95 percent cost will double, due to the further increase in inflation,” said Dr. Weerasinghe.   “If we reduce the interest rates, inflation could go up to 100 percent,” he forewarned.