Can interest rates be reduced? -politicians, economists express views | Sunday Observer

Can interest rates be reduced? -politicians, economists express views

26 February, 2023

Bank interest rates have risen sharply in recent times due to the economic crisis that engulfed Sri Lanka from 2022. The Sunday Observer spoke to several politicians and economic experts this week to seek their opinion on the interest rates, what caused it to skyrocket and how it can be lowered in the medium term.

State Minister of Finance Ranjith Siyambalapitiya

“The expenditure of the country is 20 percent of the Gross Domestic Product (GDP) while the revenue is 8.3 percent of the GDP. There is a major difference. It is in this scenario that we must pay salaries, pensions and purchase medicines. We took this task up at a time when there was a high food inflation level.

We are levying taxes to support 90 percent of the people who do not earn an income of over Rs.100, 000. If bank interest rates were not increased it would have been difficult to control food inflation which became very high. The best method is to encourage people to reduce spending and increase savings instead. That can only be done by increasing interest rates. Though it is tough on the people, this is not a situation to search answers for this issue.

If we can come to an agreement with the International Monetary Fund (IMF) the world will recognise us again and it will give them the confidence to work with us. The rupee will be strengthened by IMF support and the US dollar rate will drop. The cost of goods and services will follow. The Government’s decisions may not be popular but it is working hard to find solutions to the current problem.”

State Minister of Higher Education Suren Raghavan

“For years we have not thought about how to develop our economy. We must export other goods and services other than the traditional ones. We must also commence a political discourse on whether we can continue as a welfare State. The crisis worsened due to the tax breaks. Now inflation is dropping and the Central Bank of Sri Lanka (CBSL) Governor said that by December the rates can be reduced to a single digit. Everyone one must support this. The Opposition must support the President in his work. The next three months are crucial. We are 99 percent confident of receiving IMF support. If we receive it interest rates and taxes being levied can be reduced within nine months.”

Chairman of People’s Bank Sujeewa Rajapakshe

“The rates were increased for loans as well as Fixed Deposits (FDs). Bank interest rates are now dropping slowly as the fiscal market is stabilising. Low interest rates given for loans were revised and the customers faced some difficulties. The banking system is vital for a country’s economy. Its collapse will have devastating effects. Customers must understand that interests for loans must be higher than for deposits.

As inflation drops so will the interest rates. For this inflation will have to be reduced to a single digit. Compared to that, there will be a reduction in fixed interest rates as well as loan interest rates. If we get IMF support our international ranking will increase and foreign banks will increase its transactions with us and start lending once more. Bank interest can be reduced based on this but it will not happen anytime soon.”

Head of Department of Economics Studies, University of Kelaniya Prof. Navaratne Banda

“The CBSL intends to control inflation by increasing bank interest rates. But inflation did not increase on demand for goods and services. Banks usually increase interest rates only if inflation increases due to increased demand. The main reason for the increase in inflation in Sri Lanka was the decrease in production in Sri Lanka and the rise in the prices of goods and services in the world market. But the authorities say that inflation can be controlled by raising interest rates.

People have reduced borrowing but people have no money to save today. Therefore, the biggest impact of interest rate hikes has been on investors. Small and Medium Enterprises (SMEs) have collapsed. Increasing local production is the only way to control inflation.

Had this been done, bank interest rates need not have been changed. But now the rates increase has devastated production. Just because we receive IMF support, we cannot reduce rates if production is not increased drastically. Production must be increased. This will automatically control the interest rates.”

Senior Lecturer, Department of Economics, University of Colombo Prof. Priyanga Dunusinghe

“Today, bank interest rates have increased greatly because economic activities must be maintained without undue pressure on the Balance of Payments. By lowering the bank interest rates, people will borrow for investment and consumption. Through this, the balance of payments will be burdened, the rupee will depreciate, inflation will increase and the country will once again have long queues.

The economic contraction is temporary. That is why the interest rate has been increased. If IMF Extended Fund Facility (EFF) is received, the Balance of Payments will be eased by receiving credit facilities from world and Asian banks. This situation will change the expansion of the economy.

Then even bank interest rates can be brought down but not to the levels that prevailed in 2019 before the pandemic hit us. Therefore, everyone, including investors, must be determined to make some sacrifices. People should understand the principle of keeping the interest rates high at this particular time.”

Kelaniya University Economic Studies Faculty Prof. Ajith Dissanayake

“Prices of goods went up as production costs increased. Food inflation has decreased a bit. Interest rates have to be adjusted to control inflation. That is part of the fiscal policy of the Central Bank. It raised interest rates to increase savings and decrease money circulation. That controlled runaway inflation. Unnecessary expenditure was reined in which led to a reduced volume of transactions.

While inflation has been controlled up to some extent, there is no corresponding rise in production. Answers have to be found for the excess human capital. There is no plan to provide labour for agriculture. No one has figured out our economic structure. Our working class has to be given due recognition. These factors have to be taken into consideration when drafting economic policies”.