It’s not the interest rates, stupid!

The government and Central Bank have launched a campaign to bring down the lending interest rates to stimulate economic growth. The Central Bank in May cut the policy rates by 50 basis points and slapped the caps on deposit rates. The government is offering loans at highly subsidised rates through its Enterprise Sri Lanka programme and Prime Minister Ranil Wickremesinghe was quoted as saying in recent news reports that his government has made arrangements to bring the lending rates down to 10 percent, from 12 percent, by the end of this month. 

Credit to the private sector turned negative in January for the first time in four years. Despite the marginal increases in February and March, private credit recorded a negative growth in April and May, indicating the lack of appetite for credit in the market. Meanwhile, the non-performing loans (NPLs) in the banking sector have increased significantly, although not to crisis levels. 

It appears that the government is under the illusion that tweaking the interest rates alone can support the wobbling economy to grow. The Central Bank last week cut the economic growth forecast for this year to 3 percent, from the earlier 4 percent, following the Easter Sunday attacks on April 21. 

Lowering the lending rates can give a nudge to credit growth and thereby boost consumption in the economy. But this will happen at desired levels, which can really stimulate the economy, only if there is political stability in the country. Sri Lanka unfortunately at this juncture seriously lacks this key ingredient. 

Holding the elections remains key to achieving political stability but the good governance government that came into power in 2015 has postponed the elections and brought in changes to the Constitution eliminating the provisions that allowed going for snap elections at the times of instability. 

A recent report by HSBC Global Research painted a gloomy economic outlook for Sri Lanka this year and cut the growth forecast to 2.7 percent, from the previous estimate of 3.4 percent. HSBC was of the view that uncertainty surrounding policy and politics during the election season would weigh on economic activities. They also said any recovery in the Sri Lanka economy is unlikely until the much-anticipated Presidential and Parliament polls are held to end the current policy and political impasse. 

It is really unfortunate that when the people of Sri Lanka realised that the so-called ‘Consensus Government’ they voted in 2015 failed utterly to deliver, they have no opportunity to vote in another administration until four and a half years, due to the tweaking of the Constitution by the leaders with bitter past experiences, to make sure that history won’t repeat. 
This myopic provision culminated in a political crisis last October, where it came out in the public that the differences between the country’s president and prime minister were irreconcilable. The October 26 incident dealt a massive blow to the economy and the subsequent April bombings by radicalised home-grown Islamist terrorists completely paralysed it.  
It is understandable why the banks are hesitant to lend money, despite the government and Central Bank pushing for it. The NPLs have surged and the banks are treading very carefully. The general business sentiment in the country remains low due to the uncertainty in the political and policy fronts. 

At a time like this, it is quite natural for banks to be risk-averse. Besides, it appears that the banks have realised that more credit could be adding to the problem than solving it, as the consumer spending has significantly slowed down. The earnings of the retail sector firms listed on the Colombo Stock Exchange literally tell the story.   

Yes, there is an issue regarding lack of access to finances faced by small and medium-sized businesses. But the government’s Enterprise Sri Lanka concessional loan scheme appears to be hardly the solution for that. According to the Finance Ministry numbers released sometime back, the majority of these loans have gone into building houses and not for creating or supporting businesses. 

For businesses to thrive, political and policy stability is paramount as such a scenario provides a stable market place for them to produce and sell without much hindrance. The interest rates are secondary. Hence, it is very clear that Sri Lanka has to get its basics right.  

It was really unfortunate to see how Sri Lanka’s booming tourist industry, which earned US $ 4.4 billion in foreign exchange, fell victim to the political instability in the country. It has now surfaced that the infighting between the partners of the coalition government gave little time for them to worry about national security. As a result, Sri Lanka became a soft target for Jihadist terrorists on April 21, which left the economy and tourism industry in tatters. 

A concerted effort to revive the tourism industry is evidently lacking and the increasing tourist arrivals will allow authorities to act even more complacently. The tourism industry relief package announced with much fanfare appears to be not really addressing the issues while the authorities are yet to launch a global PR and marketing campaign to lift the damaged image of Sri Lanka Tourism. 

All in all, one thing has become clear. What really matters at this juncture is not really the interest rates but political stability coming from holding free and fair elections.  

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