The Central Bank has set up a Rs.50 billion six-month refinancing facility to support the implementation of a wide range of fiscal and financial concessions for COVID-19-hit business activities offered by the government. The CBSL has done a good job to monitor and manage the risks the commercial banks under their purview are taking. However, the challenges for the private sector is just beginning
Sri Lanka has reported 1730 cases of COVID-19 as of June 3. The authorities and the medical staff have responded effectively to the crisis and need to say on course. The effort is being acknowledged in the region as an example. The challenge from now on would be to stay on course and not lose the gains.
The lockdown is now being gradually relaxed to kick start the economy. Net capital outflows since March have been around US $ 300 million, mostly from the treasury securities and bond market. The stock market has seen a drop of around 8 percent, since the lockdown.
The Sri Lankan currency has also depreciated by around 2.8 percent against the US dollar since January. Sri Lanka’s Emerging Market Bond Index spread has more than doubled since mid-February. The government has allocated up to 0.1 percent of GDP for containment measures as well as US $ 5 million to the SAARC COVID-19 Emergency Fund.
The 2020 1Q payment deadlines for income tax, VAT and certain other taxes were extended until end-April. The president has announced that cash payments totalling around 0.25 percent of GDP will be made to the low-income groups.
Other measures announced include price ceilings on essential food items, tax exemptions for masks and disinfectant, concessional loans and food allowances for the vulnerable people.
The president has also established a Task Force on Economic Revival and Poverty Eradication and a special fund to manage the spread and social welfare spending, inviting local and foreign tax-free donations.
The Central Bank of Sri Lanka (CBSL) has adopted a number of standard measures during the crisis to foster, as much as possible, a smooth functioning of the monetary policy. These measures include a substantial liquidity provision.
Also, the CBSL has reacted with non-standard measures. These measures have been reflected in the composition and volume of the balance sheet of the banks. Making the comparison with ‘equivalent economies’, the questions arises how the other central banks reacted to the financial crisis and how effective their crisis response has been?
The CBSL has reduced monetary policy rates by 100 basis points since March. The required reserve ratio on domestic currency deposits of commercial banks has been lowered by one percentage point, the liquidity coverage ratio and net stable funding ratios have been reduced to 90 percent and the rate at which the CBSL grants advances to commercial banks has been lowered by 500 basis points.
Commercial banks cannot declare cash dividends, share buy backs or increase payments to directors until end-2020.
The president announced a debt repayment moratorium, which includes a six-month moratorium on bank loans for the tourism, garment, plantation and IT sectors and small and medium industries, with reduced rate working capital loans and investment-purpose loans for these sectors.
The president has asked financial institutions to tailor financial support measures to the needs of MSMEs. There will also be a three-month moratorium on small-value personal banking and leasing loans.
The interest rate on credit cards was capped, for transactions up to a certain amount, with a reduction in the minimum monthly repayment. Financial institutions have also been requested to reschedule non-performing loans. Lower capital conservation buffers and a relaxation of loan classification rules have been announced.
In addition, state-owned institutions will invest in treasury securities to stabilise the money market rate at 7+ percent.
The Sri Lankan authorities have introduced other measures for a period of three months, aimed at restricting capital outflows, by freezing of outward investment payments and a prohibition on commercial banks purchasing Sri Lankan sovereign bonds in the secondary market.
There are also some current account restrictions, a suspension of imports of non-essential goods except raw materials, pharmaceutical products and fuel, as well as prohibiting commercial banks facilitating imports of vehicles and non-essential goods and suspension of specified outward remittances. Inward remittances will be exempted from certain regulations and taxes.
The CBSL has done a good job to monitor the risks the commercial banks under their purview are taking. Without central banks closely monitoring commercial banks, the banks could go for excessive risk taking. It is the central banks that help maintain the balance between risk and reward even in an economy.
Although the central bank is frequently termed the ‘government’s bank’ because it handles the buying and selling of government bonds and other instruments, political decisions generally do not largely influence central bank operations.
Of course, the nature of the relationship between the central bank and government varies from country to country and continues to evolve with time.
Reshaping and rehabilitating the economy now needs to happen systematically. Globally most countries are lifting the coronavirus lockdowns and urging the public to live with the virus to prevent an economic meltdown.
The CBSL has a mandate of financial stability to enable the banking system to perform its primary mandate of supplying credit to the economy and generating economic growth. In parallel, it also uses the policy rates to regulate interest rates in support of economic growth.
The US and UK have taken unconventional fiscal and monetary measures, having been aware of and anticipating what was going to happen. Also, the policymakers are looking to scale up support for trade finance transactions to prime the market ahead of the anticipated demand returning to the global economy.
Today, both countries are faring better than most others in terms of gradually restarting limited economic activity, encouraging consumer activity and supporting livelihoods, brutally disrupted by the coronavirus crisis.
This is our moment to address our key fundamental issues and prevent the pandemic from amplifying our vulnerabilities and the social and economic consequences associated with COVID-19.
Going forward, Sri Lanka has to minimise the risk of imported cases and sustain the peace of mind for its people to focus on economic activity once again.
(Dinesh Weerakkody is Chairman of the International Chamber of Commerce Sri Lanka)