Curtailing inflation critical to avert Zimbabwe-like scenario

26 November 2022 09:01 am - 21 - {{hitsCtrl.values.hits}}

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Dr. Nandalal Weerasinghe
PIC BY NIMALSIRI EDIRISINGHE

CB Governor says focusing only on high interest rates will not get SL out of crisis
Cautions inflation spiralling out of control will wipe out businesses
Asserts it is unfair to burden depositors with negative interest rates in favour of businesses
Says those not willing to pay price should not borrow
Expects inflation to come down to mid-single digit points by end-2023

By Nishel Fernando

Although the prevailing high interest rate regime may discourage investments, Central Bank (CB) Governor Dr. Nandalal Weerasinghe asserted that curtailing inflation is more critical for the survival of businesses over low interest rates and to avert a Zimbabwe-like scenario.

“Look at the cost structure of any business. If you take cost of production as 100, the cost of finance or cost of interest (except for financial sector) accounts for only less than 10 percent as per empirical data. The remaining costs are related to raw materials, imported goods, transport and so on.

When inflation goes up by 100 percent, 90 percent of the production cost rises by 100 percent. If we let the businesses to borrow at 5 percent while 90 of their cost structures are rising by 100 percent. Can they survive? So, what’s more important? We should curtail the cost of production or inflation?” Dr. Weerasinghe asked.

He made these remarks delivering the keynote address of an event organised by the Business Economics Students’ Association of the University of Colombo, under the theme ‘Driving Towards a Resurgent Economy’, in Colombo, yesterday.

Dr. Weerasinghe emphasised that certain sectors, such as the construction sector in particular, are hit hard by the high inflationary environment. Hence, he argued that the only path out of the current crisis is by curtailing inflation, instead of focusing on interest rates, in order to avoid a Zimbabwe-like scenario.

“Inflation is only 70 percent but the prices of cement and other raw materials have gone up by 300 percent. That’s why it’s crucial to curtail inflation for anyone to do business.

How businesses recover their costs is by increasing the price of the output. When the cost of inputs goes up, they try to maintain the prices by increasing the price of their products. If inflation is allowed to spiral out like in Zimbabwe, which is at 400 percent, there won’t be any businesses,” he said.

Dr. Weerasinghe also pointed out that it is unfair to burden depositors with negative interest rates, in favour of businesses.

“When inflation is running at 60 percent and people (depositors) are getting 25 percent on their savings in the banking system, they are losing money in real terms. What’s the justification for an innocent depositor, who puts money in a bank and getting only 25 percent interest while the value of money is going down by 60 percent on a long-term basis.

A positive real interest rate should be maintained to encourage to save and those savings can be gone for businesses to invest. Banks are borrowing at 25 percent and how can they lend to businesses at an inflationary environment at 5 percent or even lower margin? The market is demanding more and more credit, competing with each other. Borrowing is a choice of the borrower, if you are not willing to pay the price, then you shouldn’t borrow,” he elaborated.

Meanwhile, Dr. Weerasinghe shared that the CB expects inflation to come down to mid-single-digit points by the end of next year, as there is a 12-18-month transition period following monetary tightening measures.

He blamed excessive money printing coupled with deep tax cuts during the last couple of years for the current high inflationary environment while noting that the CB was able to maintain inflation at around 5 percent on average from 2009 to 2020.

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Comments - 21

Jude Saturday, 26 November 2022 09:47 AM

Yeah you may have to print ONE billion Rupee currency Bills or people have to use a wheelbarrow to carry the Cash to do the grocery shopping Huh!!

Sunil Saturday, 26 November 2022 09:48 AM

The common man cannot understand all this high-flown economic jargon. However, what he does understand is that the economic situation of the country is becoming worse with each day that passes and the draconian undemocratic methods being imposed by a dastardly president is adding unsurmountable burdens on the people.

Mahila Saturday, 26 November 2022 01:15 PM

What should be born in mind by the protesting public, is cause for crisis is mismanagement by uninitiated FM MaRa 2019/2021, BR June 2021/May 2022 – not economist!!! Their focus electing, unelectable Brother Gota, President!!! Economic hardships are the outcome when economy is mismanaged!! To correct the Economy back to stream, interest rate hikes are necessary. Disincentivise borrowing and discretionary spending – consumerism – thereby curtail production!! Over time period helps bring inflation and consumption to manageable limits!! Slow process, meaningful have results end 2023!! Mismanagement – Politicians, non-economists, only political electioneering ambitious!! Disaster outcome – deprivation and starvation! Chaotic rallies wouldn’t help resolve!!

Alam Saturday, 26 November 2022 09:51 AM

Rubbish, Zimbabwe was/is corrupt. From the core. Laws put to benefit the elite. Too many oppressive laws. Same as Sri Lanka.

Jayampathi Saturday, 26 November 2022 10:28 AM

The inflation is year on year comparison. The inflation will come down to single digit means the current prices will remain at same high level in next year. Both CB and politicians are responsible for the current situation. It is a responsibility of the CB to guide the government for correct path, which we can see now , bur wasn't in last couple of month. As the Governor of CB , Mr Cabral till justifying the decisions taken under him.

Reformist Saturday, 26 November 2022 10:43 AM

Those clowns in Parliament do not understand any of these. Many of them want you out as they want to go to villages and promise handouts and more public service jobs to get elected again, ballooning the already inflated useless public service. Wonder why you accepted this job in this corrupt country as these corrupt politicians and corrupt public servants will never stop their deeds. SLankans should agree to hand over the management of the country to Singapore for two years. You will see the results!.

joshua Saturday, 26 November 2022 11:20 AM

One side you are talking sense and the other side is increasing the prices every minute. Is there an economy theory like that..... Cabraal knew nothing and spoilt everything and vanished and we general public continue to pay for his and Basil's sins

jaya Saturday, 26 November 2022 12:04 PM

Yep. Just give 8% rates for the large corporations and let the SME die. Good luck to banks when those corporations default.

Sri Saturday, 26 November 2022 12:22 PM

Dirty Politics and politicians have badly damaged the economy of this country...now; all come up with scenarios of different models ...neither west. Or east will help us ..this locally made problem and our politicians must take responsibility for this ..people will teach a bitter lesson in next election for all these Nakiyas in politics...these old politicians neither understand economy of modern world not politics of modern world ..time has come to send them home all...A new blood of politics is needed badly ...youths are ready for this and some new faces should come soon to save this country from this old and dying Nakiyas.

tilak Saturday, 26 November 2022 12:45 PM

SL will not come out of this mess unless and until the Rajapakses are out of politics and the wealth of the nation they looted and siphoned off to other countries is brought back to SL

saman Saturday, 26 November 2022 01:03 PM

This is your job CB Governor. The country pays you and not the president, or PM or 225 idiots in the parliament. Curtailing inflation, focusing on interest rates, implementing proper monetary policies, avoiding excessive money printing, deep tax cuts etc. etc. is what you have to do. You cant be a slave of the above people. Like in other countries you have to be independent and stand on your grounds. If not handover the job to some one who can do it and retire. You mentioned during the last couple of years CB was able to maintain inflation at around 5 percent on an average. So do that.

Dee Saturday, 26 November 2022 01:11 PM

We can't understand! We don't have a solution! We will not help anyone else to solve the crisis! We want immediate general election!! Because this country is facing 'Economic Armegedon'

Banker Saturday, 26 November 2022 01:32 PM

CB Governor has to balance things to please the Government and at the same time to save his job. It is the public that have to face the music consequent to those actions. Meanwhile nobody talks of the rascals who are behind this crisis and about measures to recover the robbed wealth of the people.

Mbppe Saturday, 26 November 2022 01:39 PM

What is Zimbabwe scenario? Cricket now like that. There they can hunt Rynos and sell horns for $$. Here sell excess oil quota and ganja to foreigners for $$ Why not introduce a QR code a modernistic trend for a rice subsidy like before 77, to stop rice corruption. I think Zimbabwe is better now.

Mizaru Saturday, 26 November 2022 02:33 PM

I had lunch at a local Sri Lankan restaurant and just paid the bill. The price was 10% more than what I paid last week. This man should make statements as the governor of the Central Bank of Sri Lanka. He is more of a politician than an economist. His command of the queens or kings tongue is horrible. Is he speaking Australian or POMie.

Shiran Saturday, 26 November 2022 02:40 PM

What about the corrupt Corporate sector. One wonders who corrupted whom?

Lion Saturday, 26 November 2022 04:02 PM

You will not be able to achieve anything positive while having masters who are A grade thieves.

Nuwan Saturday, 26 November 2022 04:44 PM

Well this is harder for the masses to understand. It is the handout economy many are used to. Unfortunately the rich in Sri Lanka are also ignorant of how interest and inflation works. That is why Priyamalis can dupe them to invest in piramid schemes.

Lanka will become a Somalia Saturday, 26 November 2022 10:43 PM

Zimbabwe may be OK for now. But my worry is Lanka does not become a Somalia, with every joker carrying a gun. I was once told by a Somali, that they have guns in hand, but shortage of slippers is worrying them, because there will be summer very soon.

Dilshan Perera Sunday, 27 November 2022 11:48 AM

He's turning out to be a success.. and ultimately a world renowned legend!

Aquarius Monday, 28 November 2022 03:17 PM

As well as cutting down human resources at local government levels and government institutions, it would be best to cut down the number of ministers in parliament. This is totally disproportionate compared to the population and the biggest hindrance to go forward as a nation. Except the JVP, nobody seems to be interested to bring this up as a party manifesto. Why?? because they are all waiting to make big money when they are given a ministerial portfolio.

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Curtailing inflation critical to avert Zimbabwe-like scenario

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