Only the rate cut of CB not enough: Cabraal

Ajith Nivard Cabraal

Jun 19, 2020 (LBO) – Sri Lanka needs to think out of the box and have a different approach to the present local and world economic crisis stemming from COVID -19, a senior official said.

“We need to look at more out of the box thinking. If you want to stimulate the economy you should have at least a 10 percent series of initiatives – ten percent of GDP,” advisor to the Prime Minister on Economic Affairs Ajith Nivard Cabraal said.

The Monetary Board of the Central Bank reduced the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of licensed commercial banks (LCBs) by 200 basis points to 2.00 percent, with effect from the reserve maintenance period that commenced on 16 June 2020.

That’s the standard approach for a Central Bank to stimulate you to have a rate cut then you reduce SRR, Cabraal told Lanka Business Online exclusively.

“I would think that’s not enough at this time. Not the cut but as an instrument,”

“The cut itself won’t stimulate the economy because people have already factored all this in and there is already excess liquidy in the market.”

The issues now he says are that people don’t have much confidence.

“The transmission of credit is not there – some creditworthy customers are not so anymore and there is less scope for lending – there are no new projects coming up and so on … these are the things we should be looking at … ”

“As a policy, we need more than a rate cut to come out this debacle. We need more and more new ideas.”

However, Cabraal acknowledged there was a need to keep an eye on inflation, but argued that the policy rates cut would enable the island to grow at a much faster rate.