Rate cut exerts very little stimulus for investors but big impact on savers
Sri Lanka’s expectation of encouraging borrowings by lowering interest rates as a key tool to stimulate economy during the COVID-19 crisis period has very little impact in spending and investment, several economic analysts and bankers said.
Low interest rates cannot rescue Sri Lanka in the present stage of economic calamity; they simply cause the money to flow to people who have other interests in the system, eminent economic analyst and former Central Bank (CB) Deputy Governor W.A Wijewardena told the Business Times.
Economic rehabilitation requires the country to use its human, physical and knowledge capital for enhanced production, he pointed out adding that cheap money or flooding the economy with credit will not help the country to attain that goal.
As it is, the CB has to go for further reduction in interest rates to discourage banks from parking their excess money amounting to about Rs. 160 billion with the CB; that will be suicidal because savers will not get enough remuneration for their efforts, he added.
In that way, more problems are being created for the economy and the current low interest rate regime should be managed properly, Mr Wijewardena said stressing that there were no further possibilities for interest rate cuts in the economy.
On the other hand commercial banks and non-bank financial institutions have not responded promptly in passing the benefit of interest rate reductions.
Banks have equated monthly installments of borrowers, and also make it difficult to take new loans by not easing restrictions, several bank customers complained.
One-year fixed deposit rates fell to 5.5 per cent currently from 11.5 per cent in December 2019 and one-year Treasury bill rate fell to 4.8 from around 8.5 per cent
Providing a relief to borrowers, the average prime lending rate of commercial banks fell to 7.4 per cent from 9.7 per cent.
However, the lowering of interest rates has pushed three million depositors and their seven million dependants in great difficulties.
The interest rate in Sri Lanka is determined by the demand for credit, the excess of deposits and inflation, former senior banker and economic analyst S.A.P. Suriyapperuma told the Business Times.
The CB’s Monetary Board also sets interest rates with the aim of raising Sri Lanka’s savings rate, which has been a public policy for nearly 50 years.
As a result of these policies, Sri Lanka’s savings have increased to 26 per cent from 18 per cent over the past 30 years, he revealed, adding that after the loan interest rate was set between 4 and 11 per cent, the banks immediately brought down the deposit rate to 5 per cent.
Low interest loans should be made available to investors and businessmen. But the provision of refinancing facilities on state intervention should be made through funds obtained from foreign funds and innocent depositors should not be held captive for this purpose, he pointed out.