CB SL still to evaluate the impact of high interest rates on banks
The Central Bank of Sri Lanka (CBSL) continues maintaining its increased high interest rates without compelling the government to implement economic reforms as soon as possible with the aim of minimizing their impact on the country’s production sector.
High interest rates usually have a negative impact on the stock market. Those who have a deep understanding of managing banks will know this very well.
The impact of these high borrowing rates will be seen in a few months. Meanwhile the Government is struggling to pay for imports of essential goods, including fuel, essential food and medicine. The high interest rates have had a huge impact on consumption and investment.
The Central Bank is still to evaluate the impact of high interest on the banking sector although its head,Nandalal Weerasinghe is talking big about it claiming high interest rates are aimed at controlling inflation.
Deputy Governor of the bank Yvette Fernando told journalists at the Monetary policy review media briefing last Thursday that currently because of the moratorium in place the Central Bank has not had a proper assessment of the banking system.
The central bank plans on conducting a diagnostic study on the big banks and if there is a requirement of capital, that they would have to re-capitalize.
The board of the Central Bank has permitted major banks to use their capital buffers and also to stagger impacts to the balance sheets because of interest rate changes.
The bank pledged to continue monitoring the changes in interest rates in order to prevent it from affecting the banking system
The financial sector has to be managed carefully given high exposures to the public sector Ms Fernando disclosed .
The necessary macroeconomic adjustments may initially adversely affect growth and poverty, but will correct the macroeconomic imbalances, help regain access to international financial markets, and build the foundation for sustainable growth. Mitigating the impacts on the poor and vulnerable remain critical during the adjustment.
Reductions in poverty will require an expansion of employment in industry and services and a recovery in the real value of incomes.
On the upside, a credible reform program supported by financing from international partners could enhance confidence and attract fresh capital inflows, she added.
However, several eminnt economists said , for a developing economy, the interest rates should be kept low, as taking loans at 20-25% will push businesses to maintain higher profit margins, which Sri Lanka is experiencing now.
They noted that reforms should be implemented with the aim of minimizing the impact of higher interest rates on the production sector of the country.
Moreover, based on the financial results of local banks for the second quarter of 2022, interest expenses of leading private banks grew by 25-50% for the first half of 2022 compared to the same period in 2021, while the State-owned Bank of Ceylon saw interest expenses increase by 65%.
In the update of the International Monetary Fund’s (IMF) World Economic Outlook, it asked central banks worldwide to raise interest rates, warning that the global economy is nearing a recession, as it forecasts the economy to slow down to 3.2% in 2022 and 2.9% in 2023, with major economies such as the US, China, and Europe stalling.