Dec 11, 2012 (LBO) – Credit ceilings imposed on Sri Lanka’s commercial banks had served their purpose and were part of temporary measures to stabilize the economy, deputy Central Bank Governor Nandalal Weerasinghe said. In February 2012 Sri Lanka raised interest rates, imposed an 18 percent cap on commercial bank credit growth and partially floated the rupee to drag the monetary system back from a balance of payments crisis.
The finance ministry also raised fuel prices to reduce bank credit taken by state energy utilities which was the main trigger for the monetary system to slip into a balance of payments crisis.
Weerasinghe said the credit ceilings were able to deliver a punch and bring quick results which would have taken longer if only interest rates had been relied upon. The recovery would also be quicker he said.
In later March 2012 however, the finance ministry also raised taxes on items like automobiles, amid warnings that it would be an ‘economic sanction’ imposed on the country, depriving revenue to the state.
Lower revenues worsen credit pressure, forcing interest rates to be kept high longer than necessary and delay any eventual recovery.
Both the International Monetary Fund and LBO