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By Ravi Ladduwahetty

The proposed changes in the Monetary Act aim to bring down the current high cost of finance, a senior Government Minister said yesterday.

Minister of Rural Economy and Deputy Minister of Finance Bandula Gunawardena told the Daily News that reducing the Central Bank mandated statutory reserve for banks' interest rates should fall below 10% in 2003.

"The Government has realised that the interest on borrowings has been one of the major impediments to the growth of the economy and decided to bring the statutory rates down in a bid to drastically reduce interest rates," Gunawardena said.

These measures which will be taken under the Government's ambitious Financial Sector Reforms Program, will ensure that Sri Lanka's interest rates on lending will match some of the newly developed countries and the Tiger economies in Asia such as Japan, Korea, Singapore, Taiwan, Malaysia and Hong Kong, he said.

The Deputy Finance Minister who attributed the high interest rates in Sri Lanka due to imprudent political policies of successive Governments, said that the reduction of the interest rates will also bring down costs of production which will have beneficial aspects on the cost-of-living.

This will also bring down the costs of borrowings and production costs which will definitely enhance competitiveness of Sri Lanka's exports.

Gunawardena said that the Reserve Ratio for commercial banks by the Central Bank was stipulated by American Economist John Westerner in 1949 when the Central Bank of Sri Lanka was set up in 1949 and thus remained.

Governor of the Central Bank of Sri Lanka A.S. Jayawardena said that the reduction of the Statuary Reserve Ratio was a decision of the Bank and they will abide by the directive of the Government if there is a need.

President of the Federation of Chambers of Commerce and Industry of Sri Lanka and Senior Vice President of the SAARC Chamber of Commerce and Industry Macky Hashim said: "This is indeed a very laudable move by the Government and will come in handy for all enterprises which have come under the parate execution system.

There were 600 businesses which had taken loans up to Rs. 1 million which were subject to this phenomenon and they were given time for restructuring. The decision to reduce interest rates will be specially welcomed by the small and industries sector. This will also increase the potential for employment generation.

Chairman of the Ceylon Chamber of Commerce and Managing Director/CEO of Associated Motorways Ltd Tilak De Zoysa said: "We welcome this strategic decision at a time when the national economy is picking up from a deep crisis and this will enhance the opportunity for the establishment of new ventures. This will also give opportunities for the companies to recover from the high interest burdens which have been existent for the last few decades. The decision is all the more laudable as this will have a positive bearing on the overall economy.

This will definitely create the impetus for positive private sector growth. There will be incentives for domestic industrialists and Foreign Direct Investments (FDI) will also be spurred due to the investor-friendly growth conditions. Sri Lanka's interest rates were hitherto the highest in the region and this will set off this adverse imbalance.

Hatton National Bank's Managing Director/CEO Rienzie.T.Wijetilleke, speaking to the Daily News in a telephone interview from London said:" The reduction of interest rates is a positive move in the right direction and this will trigger the inflow of funds into the money market.

This move is consonant with the conditions and the backdrop of the global economy and this will kick off some much-needed infrastructure projects. However, this would have a bad effect on the pensioners who are totally dependent on Fixed Deposit interest for their livelihood.

HNB's Deputy General Manager (Corporate Finance) Duleep Daluwatte said: "It is a good thing to reduce the interest rates on deposits and advances which will augur well for the overall development of the economy. It will create the opportunity for the advancement of infrastructure related projects and will also create employment. There will be a growth in the overall borrowings among both the corporates and also retail borrowers. The reduction of the interest rates will not have an adverse impact on the economy in terms of the deposit rates, as this will be on par with the borrowings rates.

This will fall in line with the market rates. This will make borrowings more affordable. The timing of the reduction is also important in that there is much liquidity in the market. The liquidity will rise when the interest rates come down.

Chairman of the Banks Association of Sri Lanka and Country Head/CEO of Citibank NA Kapila Jayawardena said: "The decision to reduce the interest rates will enable investors to access funds easily and therefore, production costs will definitely decline. If the Reserve Ratio and the interest rates are brought down, it is very likely that the economic growth will exceed the projected 3.5 percent by the Government. There will be definitely a remarkable growth in the Fourth Quarter in 2002.

Chairman of the Commercial Bank Mahendra Amarasuriya said: "We welcome the move and will be bringing down the rates in compliance with the Government's decision to do so. However, the reduction of the interest rates will have to be matched by the corresponding reduction in the inflation rates, otherwise it will be a mismatch. The interest rate is not the only criterion in the determination of prices. There are other criteria such as inflation, the strength of the Rupee and also liquidity in the market.

There will be the segments of the economy such as the pensioners who will have to be depend on their savings and other funds.

President, National Chamber of Commerce of Sri Lanka Chandra Embuldeniya said the Government's decision would be a good move. "When the ratio is brought down, commercial banks will have more money for circulation. That means banks will have the opportunity to aggressively promote lending creating a competitive atmosphere among banks. This will eventually benefit industrialists.

However, he said the reduction of interest rates depends on two other factors: inflation and supply and demand position.

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