The impact of the government reducing its policy rates by 25 basis points on Friday was immediate, with overnight inter-bank borrowing rates also coming down by almost that amount to 8.85 percent, however as rate reductions have a negative impact on deposits, those such as pensioners, who depend on interest income for their livelihood, are suffering due to a low interest rate regime prevalent on deposits, market sources told The Sunday Leader.
“We are used to a culture of saving, not playing the stock market to earn our bread and butter,” a source said.
“So when interest rates fall, those living off the interest they get from their deposits, suffer. Policy makers must realize that Sri Lanka is an ageing society”, the source added.
Pensioners who are living off their savings are seeing their interest income being eroded as a result of the movement towards a low interest rate regime, on the other hand such a move is not being compensated by a reduction in food prices either, rather, the opposite is taking place with the increase in food prices.
“Department of Census and Statistics says that inflation is coming down, but with vegetable prices and such like going up, the ground reality is different,” the source said.
Another market source said that with seeming inflationary pressure enveloping the economy as a result of the recent increase in food prices causing cost push inflationary pressure on the economy, coupled with the high market liquidity creating demand pull inflationary pressure on the economy on the other hand, there is no space for the Central Bank of Sri Lanka (CBSL) to relax its monetary stance further.
“We may see borrowing rates also coming down by that amount,” he said. “But I don’t see the CBSL easing its monetary stance again due to prevailing economic conditions,”. However, he said that policy rates have bottomed-out and there are signs that credit is picking-up, especially in the tourism, power and port sectors.
“The slow growth in the economy has to be looked at in the global context, where the world is just recovering from the worst recession since the Great Depression of 1929,” the source said, ” As such investors are cautious.”
It’s the long term development that is in the horizon, like infrastructure development, as opposed to retail led economic activity. That is the play.
Bolt From The Blue
However another source said that most banks felt that CBSL’s policy rate cut was unwarranted. With inflation picking up in the region and in Sri Lanka as well, and several countries tightening, not loosening their monetary policy stance, the recent rate cut came as a bolt from the blue, he said.
With daily surplus liquidity absorbed by the omo operations alone being in the region of Rs. 30 billion, coupled with the other instruments that CBSL uses to drain out excess liquidity on an overnight basis being in the region of Rs. 130 billion in total, therefore the rate cut was unwarranted, he said.
This excess liquidity has been caused by foreign subscription in Government Securities (GS).
“However, the ideal way to build-up foreign reserves are through Foreign Direct Investments (FDI) and not through the subscription in GS,” he said. “FDI translates to the building up of fixed assets and goods and services which in turn create employment and trade”.
But Cabinet Minister Wimal Weerawansa’s recent antics are a further dampener to FDI, the source said.
Meanwhile CBSL intervened in the market on Thursday, to prevent the further strengthening of the exchange rate, after the U.S. dollar slipped by 15 Sri Lanka Cents (SLC) (over Wednesday’s close) to be trading at Rs. 112/85/90 in two way quotes in the money market, while on Friday it dropped by a further 15 SLC to be quoted at Rs. 112/70/80, before CBSL intervened in the market to prevent it from going up further by buying the same at Rs. 112/75 at spot.
The strengthening of the exchange rate is attributed to exporters encashing their dollars, remittances and other inflows, the latter, however not being necessarily foreign aid.
Last week’s primary Treasury (T) Bill Auction, impacted by the recent rate reduction, saw Bills of 91, 182 and 364 day tenures slip by nine, 21 and 12 basis points (bps) to 7.98%, 8.75% and 9.17% respectively.
Coinciding with the July 9 policy rate cut, T Bond rates in secondary market trading the past week also came down by 10-15 bps to close the week at 9.35/40%, 9.45/50%, 9.65/70% and 9.75/80% in two way quotes of maturities of 2012, 2013, 2014 and 2015 respectively.
(See also Business Editorial)
FDI In November
Foreign Direct Investment (FDI) will flow into the country in November, Treasury Secretary Dr. P.B. Jayasundera told The Sunday Leader.
He admitted that there was a paucity of FDI currently.
Jayasundera said that these inflows will be both from the East and the West, but refused to go into detail.
On the fact that credit has not picked up and that banks’ lending rates were high, he said that there will be a solution to this problem. Speaking at a function in Colombo on Friday he said that while Central Bank of Sri Lanka’s (CBSL’s) policy rates were coming down, banks’ profits were increasing, inferring that lending rates have had not commensurately come down. He admitted that there was no change in the interest paid to banks in CBSL’s open market operations despite the fact that policy rates have had come down, and blamed this on the banks.
When asked whether the newly constituted state owned Regional Development Bank (RDB) will be lending not only to the SME sector, but also to State Owned Enterprises (SOEs) such as the loss making CEB as well, he answered in the affirmative. “CEB provides us with a key service, electricity,” he said.
The RDB, formed after the merger of six profitable regional development banks has a stated capital of Rs. 3.2 billion, a loan and a deposit portfolio of Rs. 39 billion each and an NPL ratio of 4.8%.
Fifty per cent of its lending is towards the agriculture sector where the lending rates are between 8-12%, while other borrowers are charged 16%.
RDB now wants to focus on the tourism sector as well. The value of its loans average between Rs. 75-100,000; but that quantum could go up after the merger.
RDB which has a weightage towards the SME sector is also exploring credit lines from the ADB and the World Bank. “I told such institutions to go if they cannot service the rural sector,” Jayasundera said.
He also said that the Samurdhi banks have a portfolio of Rs. 14 billion for investments. “Why cannot they use that portfolio to buy shares in companies such as John Keells,” Jayasundera said.
Firm On Low Interest Regime
The government is caught up in a quandary of trying to push credit on one hand, while trying to ensure price stability on the other.
President’s Adviser on Banking Dr. (Mrs.) Ranee Jayamaha refuted claims that food prices have increased.
In fact statistics show that vegetable prices have decreased, she told The Sunday Leader.
She was replying to a question posed by this reporter that pensioners who depend on their savings and fixed deposit interest for sustenance were being hit because of the decline in deposit rates coupled with rising food prices.
Jayamaha said that a low interest rate regime was needed to spur credit growth.
She also refuted the charge that locals were more comfortable in having their cash in bank deposits, rather than in equities.
“That culture is changing,” she said. “The number of investors who subscribed to the Odel IPO being retail investors shows that locals are now pursuing other investment avenues,” said Jayamaha.