Sri Lanka interest rates tied to inflation, Fed: CB Governor

Jan 01, 2016 (LBO) – Sri Lanka will review policy interest rates based on inflation outlook and external factors such as Fed interest rates, the Central Bank Governor told a press conference.

“The key thing to look at is inflationary expectations and that is something we have full responsibility for,” Governor Arjuna Mahendran said.

The Monetary Board raised the statutory reserve ratio (SRR) of commercial banks by 1.50 percentage points to 7.50 per cent on Wednesday but left policy rates unchanged, the first change to the SRR since July 2013.

“Our statutory reserve ratios are low by international standards. For every rupee that a bank receives in terms of deposits it could lend 94 cents in the past, now its 92 and a half cents,” he said.

The raising of the SRR would curtail lending that has been seeping out of the balance of payments through non-oil imports he added.

“Basically there has been an overhang of excess of liquidity in the money markets, and this has been gradually decreasing,” he said.

Mahendran said he doesn’t rule out the possibility of raising interest rates, but other factors to watch include the US Fed’s tightening of monetary policy and the European Central Bank and Bank of Japan’s tendency to ease monetary policy.

“Let’s watch and see what the Fed reserve does in the months to come. It would be damaging for the economy to raise interest rates aggressively at this point,” he said.

“We don’t want the general structure of interest in the economy to rise. By raising the SRR we are able to confine those rate increases to the very short term interest rates in the money markets,” he said.

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BKVWHK
BKVWHK
6 years ago
Nirmalan Dhas
Nirmalan Dhas
6 years ago

The question to ask is whether we have enough “structure” to “absorb” liquidity. As far as I can see at the moment we most certainly do not. Without structure in place processes will run wild and generate distorted systems that will support corruption and crime. This is why if one were given a billion dollars in Sri Lanka one may not be able to come up with an interesting investment program other than some crooked scheme to run away with the money and stash it away in some tax haven somewhere or set up some well disguised illegal operation dealing with gun running, drug smuggling, human trafficking, protection racketeering and so on. The island has a tiny population of 20 million people most of whom speak and think and dream in an obscure language, have little or no clue or concern about what is going on in the world and have tendency towards emotional volatility and physical violence that easily degenerates into torture, rape and murder on a large scale. A large number of them dream about a return to an ancient imagined feudal culture and political system which they fondly believe is better than anything that has ever been seen anywhere in the world at any time and which holds secret remedies to all the ills of the world.

The government of such a small country can quite easily create a complex structure that can absorb liquidity but unfortunately the government does not seem to know how to do it or for some reason is unable or unwilling to do it and what little that it attempts is riddled with fundamental flaws. The megapolis development which is said to be the flagship of the governments development fleet is beginning to look like a barge that is getting increasingly weighed down and crowded with politicians looking for pork barrels the content of which barrels if they are produced will only add to inflation. As a consequence the fundamental “structure” of citizen governed cities is being superseded by a hollowed out “ministry run megapolis”. The userping of the powers of the Colombo Municipal Council by the Urban Development Authority that is not in any way accountable to the citizens of Colombo has already created immense problems and brought massive corruption and one can be fairly certain that the Ministry of Megapolis and Western Development will bring mega problems and mega corruption along with whatever else it does. If on the other hand this “Ministry of Megapolis and Western Development” is replaced by a “Ministry of Megapolis Development” that does not replace Municipalities and other councils that are responsible for the administration of cities but engages in policy formulation and legislation and regulation that facilitates the emergence of megapolises in not just the western province but the northern, eastern, southern and central provinces as well in keeping with the national physical development plan that has already been drawn up, then we would have a reasonable structural framework that can draw in liquidity through the creation of investment opportunities. Of course this will also require the increase of knowledge. Knowledge will have to be “imported” since manufacturing knowledge takes much time, and the imported knowledge will have to be dispersed and this is what makes the institute for organization developoment and design very very important.

The continuing failure to provide the “structure” required for development is “bad governance” and inflation is not the only problem that it will contribute to and it may in fact very successfully turn the island into some king of outpost of the “black economy” which is where it was very successfully heading until January 2015. The provision of this structure is the responsibility of the legislature BUT unfortunately hardly any of the legislators we have elected even know that they are legislators responsible for ensuring that the legislative and regulatory framework required for policy implementation is in place. Most of them think that they are “development practitioners” who have been elected to build toilets or do sundry other “development work”and some have even taken to threatening to set themselves on fire in parliament instead of engaging in the work of legislation.

It may therefore be of much use if the central bank can – instead of coming up with the old story of the relationship between inflation and interest rates – take a look at how sound the prevailing structure is and push the government to do its job by constructing a structure that can not only absorb liquidity by creating avenues for investment but draw in foreign investments and generate an asset base that over time ensures a steadily – though perhaps cyclical – increase in GDP that adds to the national wealth and generates a strong national currency. If not we will continue on the path to 200 to 220 Rupees to the dollar.

Kuma
Kuma
6 years ago
Reply to  Nirmalan Dhas

Wellsaid Sir.

samsaroyan
samsaroyan
6 years ago
Reply to  Nirmalan Dhas

I agree not being able to absorb or disperse the liquidity will create massive bubbles in Sri Lankan economy. Asset prices will go up creating dangerous housing/asset bubble, money will sloshes in to stock market and create a market bubble. All in all it will be a short term gain for a long term pain.

samsaroyan
samsaroyan
6 years ago

Feds raised interest rates by 25 basis points (0.25), and market went berserk. Since the interest rate hike North American markets lost over 2 trillion dollars. QE was going on even after Feds announced QE 3 was over, and real stop to QE happened only after the rate hike. So looking at market destruction and how vulnerable the global economy still really are, Feds will have no other option but to start QE 4. In Sri Lanka Rates have to be higher than the inflation otherwise pensioners, retirees and fixed income earners will lose out real income. The question is how much higher?
Real issue in Sri Lanka is bad Fiscal policy rather than a bad Monetary policy, let’s see what government is going to do to tackle that…..