Lending rates triple in just one year pushing many borrowers into default

Sri Lanka’s average bank lending rates more than tripled in the shortest period of time in its history after the Central Bank tightened its monetary policy the most to fend off runaway prices caused by the worst currency crisis that exacerbated into a fully-blown social and economic turmoil.   
According to data available through August-end, the average new lending rate which measures the average price of all loans granted by licensed commercial banks in and around August climbed to 24.18 percent, logging a 176 basis points increase during the month. 

In comparison, the rate stood at 8.04 percent a year ago, or slightly less than one third of what it is now, when the Central Bank changed track and started tightening its monetary policy for the first time after remaining extremely dovish since the start of the pandemic in March 2020 to provide stimulus to the economy beset by pandemic-induced lockdowns. 
Since last August 2021, the Central Bank had raised its key policy rates by a collective 1,000 basis points or by 10 percent through July this year, including the 700 basis points jumbo rate hike delivered in early April to rein in the prices which had already spiralled out of control after the rupee was let go willy-nilly on March 7 after the country’s usable external reserves dried up. 

Just prior to the April’s bumper rate hike, the average new lending rate stood at just above 10.0 percent, reflecting that the monetary tightening which came since April alongside the government’s announcement to default on its foreign debt did the bulk of the rate lifting in the lending markets. 
Although the average rate stands at above 24 percent, some of the products such as pawning, credit cards and temporary overdraft facilities are priced at well over 30 percent. 

The sky-high rates took the country’s consumption and investment activities in a tailspin as the economy gave up 4.8 percent if its output in the first half of the year and estimates show that it is on course to erase well over 8.0 percent value by the year’s end. 

Although the credit provides ammunition for growth, which is an essential condition for lifting scores of people out of poverty, the Central Bank, just like any other central bank in the world has chosen its fight against inflation as its top priority as Sri Lanka is now among the world’s basket cases with inflation at 70 percent.