Comment

A fillip to the economy

As we have stated in these columns earlier, Sri Lanka’s economy has been remarkably resilient throughout one of the darkest chapters of world financial history. Domestically too the economy had to contend with several issues but they were also overcome successfully.

There is resurgence in the economy with the end of the conflict.

This is not only indicated by the recent performance of the stock market, but also by international investors’ renewed interest in Sri Lanka.

According to the Central Bank, Sri Lanka is poised to enter a more promising era. Rising domestic demand along with the reconstruction and development of newly liberated areas will help expand domestic production and add to the country’s output. This would also hopefully lead to the removal of certain barriers that affected economic growth.

One such problem that businesses and investors had faced in Sri Lanka was high interest rates. This was perhaps necessitated by economic conditions, but the Central Bank has taken action to reduce interest rates from time to time. Now the Central Bank has further relaxed its monetary policy stance to expand the growth of credit to stimulate the country’s economy. This would lead to a reduction in lending rates.

Other steps include the eradication of the Statutory Reserve requirement to 7 percent from 10 percent and the reduction of the repurchase rate to 9 percent. The Central Bank recently removed the penal rate of interest on reverse repurchase transactions while reducing the rate by 25 basis points to 11.5 percent.

It also removed restrictions on the number of times commercial banks can access the reverse repurchase window of the Central Bank as the lender of last resort. Banks can now borrow at 11.50 percent anytime they want.

As many economists have pointed out, this is a clear direction from the Central Bank that it wants banks to reduce their lending rates as banks have easier access to credit from the Central Bank. Market interest rates have already begun to show a gradual decline.

This should translate into a better deal for corporate and individual customers of banks. The demand for advances has already increased, says the Housing Development Finance Corporation Bank. This should augur well for reconstruction and business activities in the North and the East as well.

Another interesting development is the reduction of interest on credit card transactions. A novelty until a few years ago, they are now found in most wallets. There are nearly 900,000 credit cards in active use in Sri Lanka, most of which can be used internationally. The outstanding balance on these credit cards is Rs.33,520 million.

The safety factor and the ability to track one’s finances have made them very popular. One bank - Pan Asia has decided to take the lead in complying with the requests of the Government and the Central Bank in reducing the very high interest rates charged on credit cards, from 42 percent to 30 percent per year. This will make repayment easier for most customers. We hope that other banks which issue credit cards would follow Pan Asia’s lead.

A process is under way in several countries to reform the credit card business. This is aimed at stopping credit card companies from imposing certain late fees, restricting retroactive rate increases, as well as resorting to questionable billing practices.

A similar process should be undertaken here. Banks should also popularise debit cards, linked to customers’ accounts, which do not attract many taxes imposed on credit cards.

The dawn of peace will be a massive boost to the economy. People will have more confidence to invest and spend. The reduction of lending rates across the board will make credit available to a wider segment of the population, thus spurring economic activity. The benefits of this move will also flow to the North and the East, which are being re-integrated to the country’s economy.

The rate reduction can only be a sign of things to come, as the Central Bank intends to take more measures to develop the economy in the quest to make Sri Lanka the region’s economic hub.