Central Bank cuts Statutory Reserve Ratio to 2%

• Says the move will inject around Rs.115bn additional liquidity to money market
• Says it will enable financial system to expedite credit flows to the economy while reducing cost of funds of banks
• CB has cut SRR by 300bps so far this year and policy rates by 150 bps

In another drastic move, the Monetary Board of the Central Bank yesterday slashed the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of licensed commercial banks by 200 basis points to 2 percent.

The cut in SRR will be in effect from the reserve maintenance period that commenced on June 16, 2020.

The Central Bank said the reduction in SRR would inject around Rs.115 billion additional liquidity to the domestic money market enabling the financial system to expedite credit flows to the economy, while reducing the cost of funds of banks.

With yesterday’s decision, the Central Bank has reduced SRR by a total 300 basis points thus far during 2020, in addition to several other monetary easing measures implemented already including the reduction of policy interest rates by a total of 150 basis points and the Bank Rate by 550 basis points.

“The financial sector is expected to pass the benefit of the high level of liquidity and the reduced cost of funds to the economy without delay, by increasing lending to businesses and households at low cost,” the Central Bank said.

The Central Bank officials yesterday came under heavy fire from President Gotabaya Rajapaksa for not coming up with a plan and also not using the tools under the Central Bank to revive the coronavirus-hit economy.

He slammed the Central Bank for not issuing Rs.150 billion new money to banks to be loaned to businesses impacted by the virus-induced lockdowns to restore economic activity.

The Central Bank announced a Rs.50 billion re-finance facility end-March but according to President Rajapaksa that was not adequate.

During his meeting with the Central Bank officials, President Rajapaksa mentioned how other Central Banks in the world, including the Federal Reserve of the United States, Bank of Japan and the Australian Central Bank have come up with massive programmes to stimulate their respective economies.

“We cannot let the health crisis lead to an economic crisis. Not only the central banks in big countries but also the central banks in small countries have taken many crucial steps.

“Our Central Bank has not done anything towards this. You have several tools that can be used. Those tools have to be utilized. However, you have not used a single tool. You just stay idle,” President Rajapaksa lambasted the Central Bank officials, who attended yesterday’s meeting.

However, as Sri Lanka does not have a floating exchange rate, the Central Bank has to draw a fine line between printing money to stimulate the economy and safeguarding the country’s foreign exchange buffers, which otherwise could result in balance of payment difficulties.

Sri Lanka has already slapped controls on certain imports to preserve its foreign currency reserves.

Implements new credit schemes to support economic revival

In support of the government’s efforts to revive the economy, the Monetary Board of the Central Bank of Sri Lanka yesterday decided to introduce new credit schemes under Section 83 of the Monetary Law Act No. 58 of 1949.

“Growth of the Sri Lankan economy has fallen to dismal levels over the past few years, and the impact of the COVID-19 pandemic may result in severe stress on economic and financial system stability in the period ahead unless immediate remedial actions are taken,” the Central Bank said.

Accordingly, in addition to the already disbursed Rs.27.5 billion under the refinance scheme introduced on March 27, 2020, the Central Bank will provide funding to banks at the concessionary rate of 1.00 percent against the pledge of a broad spectrum of collateral, on the condition that banks in turn will lend to domestic businesses at 4.00 percent, while ensuring the greatest possible distribution of this facility.

This scheme along with the existing refinance scheme will provide Rs.150 billion in total to the businesses affected by the COVID-19 pandemic.

In addition, construction sector enterprises will be provided with a facility to borrow from banks, using guarantees issued by the government equivalent to the amount due on account of contracts carried out in the past, under a new dedicated credit scheme funded by the Central Bank and made available at the aforementioned concessionary rates.

Operating instructions on these new credit schemes will be issued in immediate due course, the Central Bank said.