ECONOMYNEXT – Sri Lanka’s Central Bank has asked banks not to compete with each other for deposits Central Bank Governor Nandala Weerasinghe said, as attempts were being made to bring down interest rates.
“With the tight liquidity bans are competing for deposits,” Governor Weerasinghe told a business forum organized by CT CLSA Securities, a Colombo-based brokerage.
“We have made a request for banks not to compete for deposits.”
Sri Lanka’s banking system has a liqudity shortages because the centarl bank intervened in forex markets to finance imports and gave overnight liqudity at low rates (sterilized forex sales) to stop reserve money from shrinking and rates rising, preventing a slowdown in credit.
In past currency crises the central bank mostly injected money permanently making it easier for banks to give loans without first raising deposits to keep the external sector in check.
Such sterilized interventions lead to a quick run down of foreign reserves when domestic credit demand is high.
Forex shortages and currency crises are a problem linked reserve collecting central banks with a policy rate to mis-target rates that are absent in hard pegs or clean floats.
Governor Weerasinghe in April raised the rate at which new money is injected to 15.5 percent which slowed domestic credit and excessive demand for imports from liqudity injections.
Market rates went to around 30 percent, largely due to the deficit financing and concerns over domestic debt re-structuring.
Liquidity shortages can also widen if the central bank sells down its Treasury bills before it restores credibility of the exchange rate and starts buying dollars.
In 2022 however liqudity shortages of some banks have been worsened due to risk averse banks depositing cash overnigh at the centarl bank.
Earlier in November, the central bank injected 130 billion rupees into banks permanently, raising some concerns among some forex market participants.
Governor Weerasinghe said the central bank was prepared to give liqudity to individual banks if needed.
In the past, after rates and hike and credit is slowed, a quick float restores credibility of the exchange rate ahead of an IMF deal.
However this time, there is as surrender rule in place and a peg is maintained around 363 to the US dollar and an IMF deal has been delayed due to a requirement for debt re-structuring. (Colombo/Nov30/2022)