Govt initiatives to reduce interest rates and boost economy

Taken from – DailyNews

The government was acting in a manner to boost the economy and to reduce interest rates said, Verite Research Economist Deshal De Mel.

He warned that due to a large informal sector the impact of COVID 19 on livelihoods would be harsh. He was speaking as part of the Hatch Co-Working Space’s Resilience Series on April 7.

He said that though the Central Bank had been aggressively pushing down rates market forces had kept them stable. It was only in March when the government instructed captive funds to enter did they see a decline in rates. He said “that artificially brought interest rates down. The trend of deposit rates had been trending upwards. The market pressure is for a gradual increase in rates.”

De Mel said, “The Central Bank has been on aggressive loosening cycle. All of which are looking to push liquidity in the system and get companies to borrow at lower rates.”

He said there might be negative long term impacts. Oil prices have come down by about 50 percent. “That is going to be positive but typically we see an impact on our remittances which are mainly from the Middle East. When exports come down so do intermediate exports. With the decline in exports, we will also see a decline in imports.”

He predicts a 720 million negative impact on the balance of payments which is less than one percent of GDP.

“The current account is not going to be a major source of imbalance. The negative impact we see on the capital account has been from foreign holdings of government securities. We have seen a sharp decline in foreign holdings of government securities and we have seen this for a while. A year ago in April 2019, we were at Rs 165 billion and today we are at Rs 40 billion. A lot of the investments have already gone.”

He said, “From a Sri Lankan perspective like other developing countries we have a very large informal sector.” There are 2.9 million individuals in the non-agricultural informal sector. Approximately 1.9 million of them are daily wage earners whose income would be based on attendance.

“If you don’t turn up to work you are not going to get paid. There is a significant number of people whose livelihoods are going to be affected. We can’t consider our situation like those in Europe where their formal economy is much more developed.

There are cash transfers to those more vulnerable.”

He said that government revenue was weak even before the crisis. He said that Government Revenue in 2018 was 13.3 percent which was less than half of the global median of 30.7 percent.

“Our expenditure is below global averages as well. Because of the weakness in revenue we haven’t been able to spend in areas we should spend in like health. Health expenditure is under 2 percent while middle-income countries average more than 3 percent.”

De Mel added that the budget deficit which was at 7.5 percent of GDP, could rise to 10 percent in 2020 with the impacts of COVID 19.