• Stakeholder Engagement Committee Chair Prof. Sirimal says reforms should look to minimise impact on production sector

• Says long-run intention should be to reduce rates when inflation comes under control

By Imesh Ranasinghe    The Central Bank of Sri Lanka (CBSL) should maintain its increased interest rates while reforms should be implemented with the aim of minimising their impact on the country’s production sector, said CBSL Stakeholder Engagement Committee Chairman Prof. Sirimal Abeyratne. In an interview with TV Derana yesterday (17), he said the CBSL has faced a dilemma in terms of taking decisions related to the interest rates, as an increase or decrease in rates will make one part of society happy, while leaving another section unhappy. “Those who maintain savings would like higher interest rates, while those who take loans would not like it,” he said, adding that conversely, lowering interest rates would have the opposite outcome. Moreover, he said the low interest rate regime in place in 2020 and 2021 saw the interest income of people dropping by more than 50%. “So the Central Bank has to work with this dilemma in mind, but its intention is not to make one party happy or unhappy,” Prof. Abeyratne said. The CBSL has already increased interest rates by 800 basis points since April 2022, while the Monetary Policy Review that is set to happen today could see interest rates further increased. As of June 2022, the level of national inflation was at 58.9%, while the Colombo Consumer Price Index recorded inflation of 60.8% as of July 2022. According to CBSL Governor Dr. Nandalal Weerasinghe, national inflation could reach 70% by September. However, Prof. Abeyratne said, for a developing economy, the interest rates should be kept low, as taking loans at 20-25% will push businesses to maintain higher profit margins, which Sri Lanka is experiencing now. He noted that reforms should be implemented with the aim of minimising the impact of higher interest rates on the production sector of the country. “But in the long run, our expectation should be to reduce interest rates once inflation is under control,” he added. Moreover, based on the financial results of local banks for the second quarter of 2022, interest expenses of leading private banks grew by 25-50% for the first half of 2022 compared to the same period in 2021, while the State-owned Bank of Ceylon saw interest expenses increase by 65%. In the July update of the International Monetary Fund’s (IMF) World Economic Outlook, it asked central banks worldwide to raise interest rates, warning that the global economy is nearing a recession, as it forecasts the economy to slow down to 3.2% in 2022 and 2.9% in 2023, with major economies such as the US, China, and Europe stalling.