Pressure on banks to lend to Govt.
Sri Lanka’s commercial banks are under increasing pressure to lend to the Government for its development activities, a move that has affected lending to the private sector, official sources said.
At a recent meeting between senior Treasury officials and representatives of some banks, it was revealed that the banks have already lent around Rs. 60 billion to the government in February 2013 alone, official sources revealed.
Treasury Secretary Dr. P B Jayasundera, emphasizing the need to improve fiscal discipline to some extent has told banks that commercial bank borrowings were crucial due to high government spending, the sources said.
State banks have been borrowing at a rate of 18 per cent to lend to loss-making state enterprises, though the rates have come down, these sources revealed. Treasury officials are grappling to meet the rising expenditure of several key ministries as well as loss-making state enterprises, and spending has gone far beyond the 2013 budgetary allocations, a senior government official said
Credit to private businesses from Commercial Banks was in the region of Rs. 18 billion (in February), he said adding that the banks are not in a position to give more loans to the private sector due to lack of funds despite the recent cut in interest rates. Interest rates have come down with the effective policy rate settling at around 7.8 per cent though Treasury bill, down from around 8.3 per cent before a 50 basis point rate cut two weeks back, he revealed.
When contacted, Prasanna Premaratne, Vice President, Regional Manager of DFCC Bank told the Business Times that lending to private sector enterprises will pick up gradually although there was a lull in activity due to lack of interest among entrepreneurs.
He added that the Central Bank (CB)’s move will accelerate economic activity in the country but it will take some time.
Economist and parliamentarian Dr. Harsha de Silva said the CB has obviously ignored the advice of most independent economists, including the IMF, and lowered policy rates by an unexpected and surprising 50 basis points in a desperate attempt to accelerate growth.
The CB’s argument is that inflation in Sri Lanka has been below double digits (even though it hit 9.8 per cent a couple of times) and that price stability is not a concern for the monetary regulator, he added.
Given the continuing base effect of the February 2012 adjustment of exchange rates and fuel prices, current price increases including the electricity tariff will not fully reflect in the inflation index for the next few months, he said. If the CB attempts to hold the currency in the face of depreciation pressure that will certainly build up with the weakening external account as imports will rise again and the result will not be much more different from that of February 2012; it will bring misery to the people, he predicted.