News
High interest rates cause consternation among businesses running on loans
The Central Bank’s decision to raise interest rates has caused consternation among businesses surviving on loan repayment moratoriums.
“Most of these Covid 19 moratoriums relate to loans granted to businesses at floating rates. This means the new interest rate hikes will hit them hard,” noted Colombo Business Association Chairman Chaminda Vidanagamage.
As the moratorium period granted is set to end on April 30, businesses are concerned about their accumulated debt repayments.
“However most of us understand and are ready to make the sacrifices necessary to strengthen our economy again,” he said. He added that most businesses were of the view that despite the hardships they will face, the interest rate hike is a good decision by the Central Bank, given the current circumstances.
“We believe, however, that the brunt shouldn’t be borne by the private sector alone. We have been through a lot over the past three years,” Mr. Vidanagamage said, adding that management-level employees at State-Owned Enterprises should take benefit cuts to help the economy too.
The Sri Lankan rupee hit an all-time low earlier this month. It became the worst-performing currency in the world due to the severe economic crisis that has sparked fuel, gas, medicine, and other shortages as well as prolonged electricity cuts.
The rupee, floated by the previous Central Bank Governor Ajith Nivard Cabraal after much persuasion by economists, crossed the Rs. 330-a-dollar mark on Thursday — an all-time high. Newly appointed Central Bank Governor Nandalal Weerasinghe tightened the local monetary policy to reduce the inflationary pressure, stabilize the exchange rates and “correct anomalies observed in the market interest rate structure.”
“In the short term, interest rate rise will do three things,” said Frontier Research’s Macroeconomic and Thematic Research product head Chayu Damsinghe. It will be harder to finance imports, it will incentivise those with money outside to bring money into Sri Lanka and it will send out the signal that the Government was taking strong steps to stabilise the situation.
“The combination of these factors will likely reduce depreciation pressure somewhat and help anchor the float of the currency,” he said.
Mr. Damsinghe also noted that beyond the short term, rates would most likely come down once the economy was stable and on the path to recovery.
Two weeks ago the CBSL announced a debt default as part of its measures to overcome the economic crisis. A move that some said was inevitable.
“The decision to preemptively declare a suspension of debt is likely a positive step, especially considering that the alternative would have been running out of money and chaotically defaulting after missing payments,” Mr. Damsinghe said. Since local reserves were critically low this would release some dollars for essential imports. “But proper negotiation with creditors is key to maintain confidence that the issue is being engaged with plans and processes.”
“As Sri Lanka gets downgraded (likely to a Selective/Restricted Default rating), the “ceiling” for rating will also fall,” he said, adding that this would lead to Sri Lankan banks also getting downgraded from current levels though it was unlikely they get downgraded as far as the sovereign rating itself.
He said the impact of these measures on Letters of Credit was uncertain, but this had not been directly linked to any issues in other countries. “However, given that our overall dollar liquidity situation is quite poor, the overall weakness, regardless of the decision to suspend debt, could make it a little harder for local parties to engage with foreign banks and the like in the same way.”
So far, the communication has been that rising interest rates are here for a while, at least until inflation is under control.
The newly appointed Finance Ministry Secretary has also indicated he is favour of rising taxes, reducing expenditure, and rationalization of State-Owned Enterprises. “All of this is likely to result in a harder business environment for the corporate sector, especially compared to the low tax, low rates environment over the past two years or so,” Mr. Damsinghe said.
But the outlook is hopeful, he said. “The key measures needed have already been started or communicated, so it looks like both the CBSL and the new Treasury secretary are aware of the path that they need to be on, and are taking steps towards this.”
The next steps to expect would likely be more rational energy prices, rising taxes, reduced expenditure in the possible interim budget, critically, continuing to engage closely with the International Monetary Fund and carry out negotiations with creditors.
“It is critical for all these steps to be carried out as fast as possible and as transparently as possible with as much clear communication as is practical, to move fast on difficult economic measures and increase domestic and international credibility of such measures,” Mr. Damsinghe said.
“Banks have seen an increase in the number of deposits,” noted Ranjan Senanayake, the Secretary of the Ceylon Bank Employees’ Union. But the impact can only truly be gauged over the next few months given the volatile situation, he said, adding that under normal circumstances more money would come into the banks and less would be withdrawn.
The best way to say that you found the home of your dreams is by finding it on Hitad.lk. We have listings for apartments for sale or rent in Sri Lanka, no matter what locale you're looking for! Whether you live in Colombo, Galle, Kandy, Matara, Jaffna and more - we've got them all!