Money Q & A

The World Bank and the Asian Development Bank in a joint study has found that poor infrastructure, lack of policy and political stability as key constraints that discourage investments in Sri Lanka.

Urban firms in particular cited the macro-economic instability as a reason to hold back investment. Another widely cited reason was high real interest rates. Shafraz Farook interviewed a co-author of the book in The Money Report telecast on ETV. He started by asking whether talking about high interest rates was now simply an academic exercise, because the country was in the grip of negative real rates.

A. Some countries have gone through short periods where interest rates have been negative. And as you say if it is negative right now in Sri Lanka, then obviously that’s unsustainable.

Obviously there are some winners and some losers to that situation. It’s clearly a disincentive for anybody to invest, certainly in regular bank accounts. But on the other hand, businesses can profit from that situation. Unfortunately in the rural areas, a lot of rural entrepreneurs do not understand the difference between the real interest rate and the nominal interest rate. So if inflation is 18% and the interest rate is 12 %, they don’t understand that that is a negative rate; all they understand is 12% is higher than 5% and the interest rates are