Sri Lankan gold buffer stocks depleted as other countries buy gold
Sri Lanka has reduced its gold buffer stock from 19 tons to 6.7 tonnes this February from stocks sold by the Central Bank. Many countries in the world are transforming their financial assets into buying gold that has seen gold prices rise from US$1500 from February this year.
All central banks – other than the Central Bank of Sri Lanka - are now buying gold. Meanwhile China and India have transformed their financial assets into gold last week, said Dr. W.A. Wijewardena, former Deputy Governor of the Central Bank, speaking on the topic “Financial Literacy: To survive dark side of low interest rates” at a webinar organised by the Organisation of Professional Association of Sri Lanka (OPA) and CFA Sri Lanka last week. It was moderated by Sunday Times Business Editor Feizal Samath.
Dr. Wijewardena said that much liquidity has been pumped into the financial system resulting in low interest rates where people are supposed to take advantage of high liquidity to survive the dark side of the financial catastrophe. There is a huge amount of liquidity floating around but customers find it difficult to borrow money from banks and the money does not move out of banks due to many reasons.
Although banks offer money to SME’s and to the corporate sector the micro and the SME sector which is the largest contributor to employment in the country consisting of small timers like barbers, tailors and vendors are not being supported by banks.
As a result most of these people had become victims of money lenders who employ the “eye ball test (look at you and decide)” of money lenders who lend money to their clients. The money is delivered to the doorstep of clients without guarantors or any collateral or forms to be filled at an interest of 10 percent.
The SME sector people are not benefitted at all by huge liquidity in the market place. Meanwhile in the US during the last six months, the money supply has increased to $ 18,000 billion which has caused some panic among all the central banks in the world.
Ravi Abeysuriya, Ravi Abeysuriya, CFA, CEO/Director, Candor Equities Ltd, said that one year ago the fixed deposit interest rate on average was 11.5 per cent but today any commercial bank will give only 5.5 per cent, a reduction of 6 per cent which will affect the income of depositors and have a detrimental effect on retired persons – which is a serious issue.
Another unfortunate perspective was that desperate depositors will seek to invest in risky, unproductive deposit schemes that pay high interest rates.
He cautioned depositors to pay attention when looking for higher interest paying institutions. The human nature is that when income is reduced by 50 per cent they will look out for high risk places. When inflation is high a fixed depositor will not be able to buy the same basket of goods with the money earned from fixed deposits.
“One year treasury bill rate too has come down to 4.86 per cent at the last Central Bank auction which was a massive reduction,” he said.
However low interest rates are a big boost for big companies and benefit rich people, businesses and the government.
He said investing in unit trusts is a better option as unit trust funds are invested in various bonds of conglomerates that provides a higher yield. But one has to diversify their portfolio of investments and place them in different baskets. He cautioned that some companies may even lure customers to invest in fixed deposit schemes that carry the name of the parent company but eventually these funds are channelled to a different company hoodwinking customers. Referring to borrowing he said that one must not borrow for consumption but for income generation.
Chanakya Dissanayake, Senior Director and Global Head of Investment Research, Acuity Knowledge Partners, said that people believe in fixed income rates because they are structured with a high return. But under present circumstances with low interest rates people should explore the possibility of investing in the money market funds professionally managed by asset management firms with a wider variety of financial instruments. He said the equity market is not for speculators but for medium term investors who prefer to lock in their money for at least for a two year period.
Naomal Goonewardene, Partner, Nithya Partners, highlighting the implication of tax regime with a low interest rate said the possibility of value added tax is expected to be increased in future and remains a high possibility due to loss of revenue to the state. Meanwhile the withholding tax that brought in substantial revenue to the state might also be increased. However a Rs. 3 million income per annum is exempted from tax but other taxes are likely to be increased in future.