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Wed, 30 July 2014 11:57:44
Sri Lanka senior citizen interest subsidy Rs1.2bn a year
04 Mar, 2010 13:43:01
Feb 04, 2010 (LBO) - A scheme to pay 'bonus interest' of one fifth above prevailing interest rates to senior citizens from January 01 would cost the people about 1.2 billion rupees a year, a government minister said.
The cabinet of minister had approved a proposal on Wednesday to pay extra interest for deposits of senior citizens in registered banks in the country, minister G L Peiris told reporters.

The payments would be limited to 120,000 per person, per year. The cost of the subsidy would be about 1.2 billion rupees.

"Treasury bill rates had fallen from 20 percent from the beginning of last year to about 8 to 10 percent now," Peiris said.

"Falling interest rates help small and medium industrialists. Their biggest constraint is high interest rates."

Sri Lanka's high interest rates are a direct result of government deficit spending.

But when the government prints money to finance the deficit and keep interest rates down interest rates eventually have to be raised to very high levels to bring inflation down and keep prevent steep falls in the exchange rate.

After two years of high interest rates, the Central Bank brought inflation to low single digits in 2009 from a high of 29.9 percent.

When inflation is low however, interest rates can also be low and even rates of 8.0 percent results in a 'positive real rate'.

Bjut when inflation is above 20 percent, even rates of 20 percent results in a loss to savers from a 'negative real rate,' because prices of goods and services in the real economy go up faster than the nominal interest yield.

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