Toss between loose fiscal policy and high interest rates

Member of the monetary board and the chairman of the Ceylon Chamber of Commerce Deva Rodrigo says interest rates will have to rise in the face of loose fiscal policy. Member of the monetary board and the chairman of the Ceylon Chamber of Commerce Deva Rodrigo says interest rates will have to rise in the face of loose fiscal policy. Recent fiscal efforts have not managed to keep the budget deficit under check.

“We have interest rates gradually creeping u after it came down to single digit two years ago due to strong fiscal management by the government reducing the budget deficit and paying government over due to the to the state banks, creating a surplus of cash in the banking system to lend to the private sector. That’s what we saw three years ago,” Rodrigo said.

He was addressing members of the Ceylon chamber at its AGM where he was elected to another term as its Chairman.

“Now we see interest rates creeping up again. When we look at the impediments for investments-the access to finance and cost of finance-you should be conscious of the interest rates.”

“At the moment I don’t see any other solution than pushing up the interest rates. Because, if the interest rates are not raised at this level of inflation, our rupee will depreciate. You can’t hold keep the rupee depreciation and interest rates down together when there is a huge budget deficit,” said Rodrigo.

Fiscal pressure in the last year was in part because the government did not adjust prices of services like electricity, fuel and transport.

The snowball effect of delayed reforms has meant that the CEB makes massive losses daily and consumers have to deal with a large inefficient monolithic institution.

“What is required is- to take the power sector reform process the whole length it of it by activating the regulator. A regulator has been appointed but not activated. Getting this companies formed and then go through the privatization process where at the end of it we will have multiple electricity suppliers as in the UK,” he said.

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