Economic crisis hitting poor and middle classes, small businessmen and farmers

Interest rates, which this week rose for the second time in two months, and a credit squeeze have hit the middle class and poorer segments much more than affordable groups, a Sunday Times survey shows.
However, the government strategy to curb imports and reduce the widening trade deficit was paying early dividends as there was less pressure on foreign reserves, the survey found out.

On Thursday the Central Bank raised its rates by 0.25% and 0.75% to 7.75% (Repurchase) and 9.75% (Reverse Repurchase) after increasing it on February 3 to 7.5% and 9%, respectively. Last month, the Bank also issued a strong directive to commercial banks to restrict credit. The latest increase this week was due to credit still rising, despite the controls.

Azmi Thassim, a businessman and past President of the Hambantota Chamber of Commerce, said small businesses in the region were struggling due to the economic crisis brought about by rising interest rates and other high costs like fuel. The Sunday Times survey shows that rice farmers are finding it difficult to sell their produce while poultry farmers are finding it hard to survive.

“All around small entrepreneurs are wondering whether they should close before suffering more losses,” he said, adding that many businesses including rice millers relied on credit and overdrafts.
Bankers said the new rates were impacting on non-performing loans with more defaulters expected. “There is a chain reaction as fewer people may resort to borrowings or reduce the planned quantum,” one banker said, adding, however, that the Central Bank strategy was paying off as import credit had reduced and would help reduce the trade deficit which doubled last year to US$ 10 billion.

Opposition Parliamentarian Eran Wickremaratne said the impact was being felt more amongst the poor than affordable groups. “The policy is flawed, for, rather than invest in education and health, the focus has been on infrastructure -- building roads and importing motor vehicles for these roads.”

Mr. Wickremaratne said he believed economic growth was likely to fall to around 6% this year from the targeted 7.2 % and noted that the extra growth (2-3% from average 5% during the conflict) was seen coming mostly from former conflict areas, not elsewhere.

Independent stockmarket analyst Channa Amaratunga said while the interest rate hikes had been happening over 5-6 months and were not unexpected, the impact was generally across the board. He said the rate increases would affect many top companies that had invested on new projects based on high borrowings.

“The economic landscape has changed with sharp changes in the interest and exchange, rates and inflation,” he said.

Companies like Singer, Abans and Softlogic which offered products on credit are likely to witness lower demand. Interest rates on leasing of vehicles including three-wheelers and motorcycles have gone up to around 20% from 13-14% earlier.

These developments came amidst a report by Gallup, a well-known US-based research and polling agency, released on Friday saying that more Sri Lankans were suffering today than before the war ended in 2009.

Gallup said that one in five or more Sri Lankans who are suffering is similar to the levels that it finds in many developing countries.

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