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Sri Lanka credit ceilings served their purpose: Deputy Governor
11 Dec, 2012 07:18:51
Dec 11, 2012 (LBO) - Credit ceilings imposed on Sri Lanka's commercial banks had served their purpose and were part of temporary measures to stabilize the economy, deputy Central Bank Governor Nandalal Weerasinghe said.
In February 2012 Sri Lanka raised interest rates, imposed an 18 percent cap on commercial bank credit growth and partially floated the rupee to drag the monetary system back from a balance of payments crisis.

The finance ministry also raised fuel prices to reduce bank credit taken by state energy utilities which was the main trigger for the monetary system to slip into a balance of payments crisis.

Weerasinghe said the credit ceilings were able to deliver a punch and bring quick results which would have taken longer if only interest rates had been relied upon. The recovery would also be quicker he said.

In later March 2012 however, the finance ministry also raised taxes on items like automobiles, amid warnings that it would be an 'economic sanction' imposed on the country, depriving revenue to the state.

Lower revenues worsen credit pressure, forcing interest rates to be kept high longer than necessary and delay any eventual recovery.

Both the International Monetary Fund and LBOs economics columnist columnist prematurely commended authorities a>for not imposing trade sanctions unlike in earlier balance of payments crises when taxes were upped through a midnight gazette.

Weerasinghe said especially the larger banks had space of about 90 billion rupees to lend and credit was now lower than the ceiling, indicating that they could lend if they wanted to.

Many small banks which had high growth rates had to curtail loans. But finance companies which did not face credit ceilings were able to grow their loan books.

But industry officials say the ceiling acted indirectly on finance companies, especially the larger ones, as they had a practice of borrowing wholesale from banks and lending retail to smaller and sometimes more riskier customers.'

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