Rate Order

Oct 27, 2009 (LBO) – Sri Lanka’s president Mahinda Rajapaksa has ordered a sweeping 700 basis point cut in state bank lending rates, lifting of penal rates and fast-tracking state worker loan applications, a government statement said. Officials had also discussed ways to relax security requirements of loans, the statement said.

Banks were also ordered to make sure that fisheries, agriculture and tourism which the statement said were “sectors that should be supported.”

Most of the deposits of the largest state banks, which represent the savings of the people, are loaned to the state, which runs a deficit in the current account of the budget.

Sri Lanka is now recovering from a war which ended in May, and high interest rates triggered by deficit spending and money printed to plug budget gaps which drove inflation up.

The Central Bank has now brought down inflation to below 1.0 percent, restored economic stability and set the stage for lower interest rates in the future.

It has also cut policy rates to 10.50 percent 19.0 percent and the weighted average commercial bank prime lending rate has fallen to 12.50 this month from 20.0 percent a year earlier.

So far this year, credit growth has been negative.