Borrowing Strategy

May 22, 2014 (LBO) – Sri Lankan firms and banks should look at borrowing and lending longer term as interest rates and inflation fall, Central Bank Governor Nivard Cabraal said. Analysts say Sri Lanka’s banks and their customers borrow short term as excessive state intervention in the economy, especially in energy prices lead to sudden surges in public deficit spending making interest rates go sharply up.

State energy enterprises are among the largest players in the economy and can generate borrowing pressure of 1 to 2 percent of gross domestic product in as little as six months to one year when oil prices rise or rain fail.

In the past, such moves have also generated inflation and currency depreciation when attempts were made to keep interest rates down by loosening monetary policy quantitatively.

When corrective measures are applied banks then have to re-price deposits and borrowings quickly to avoid making large losses.

But Cabraal says Sri Lanka’s budget and energy sector management has steadily improved over recent years and the Central Bank has kept inflation relatively low compared to the past.

State energy enterprises are now net re-payers into