The Central Bank says it is preparing the country to ride-out the deepening global financial crisis by increasing domestic financial sector liquidity and by targeting the Sri Lankan diaspora.
Already, Sri Lanka’s foreign exchange reserves are under pressure due to lowering export demand and capital flight from treasury bills and bonds. But the Central Bank says it is looking at increasing inward remittances to shore-up reserves.
“Because of the current global situation, when demand reduces, our funds will also reduce,” said Governor of the Central Bank, Ajith Nivard Cabraal, speaking at a seminar on the global financial crisis, organised by the Strategic Enterprise Management Agency this week.
Sri Lanka’s industrial exports have been the first casualties of the global financial crisis. Overall, industrial exports dropped by 15.5% in September, compared to last year according to the Central Bank’s external performance analysis. Export items like food, beverages, tobacco, leather, rubber, paper goods, garments and textiles and chemical products, all showed negative growth in September.
However, the inflow of private remittances has remained positive. From January to September 2008 remittances totalled US$2.2 billion and the Central Bank says it is targeting the Sri Lankan diaspora for additional streams of foreign exchange.
“Our foreign remittances are increasing and we are looking at new ways to increase inflows. We have a large diaspora scattered around the world. So we are trying out new ways to attract inflows from them,” said Mr Cabraal.
Meanwhile, although Sri Lanka’s financial sector is not directly impacted by the global financial crisis, the local economy is already experiencing a cash-shortage. Exporters for instance, are feeling a cash-squeeze because of lower, or delayed, payments for exports. The high lending rates have made the liquidity shortage worse.
“Because of the financial crisis in other parts of the world, payments for exports may have been delayed or orders may have delayed. Another reason for the liquidity shortage could be the very high lending rates. The rates are now between 26% to 38%. So businesses cannot afford to take credit and some businesses are having cash problems,” Senior Manager, Strategic Planning, Sampath Bank, Manoj Akmeemana, told The Sunday FT. Meanwhile, local banks themselves are seeing slower cash growth, because the increasing cost of living is forcing people to cut down on savings. “The banking system is also seeing slower deposit growth. Because of the high rate of inflation savings are not growing,” said Mr Akmeemana.
The Central Bank says it has addressed the liquidity shortage in the market by relaxing the Statutory Reserve Requirement (SRR) for banks. The latest reduction in the SRR to 7.75% from 9.25%, is expected to inject about Rs 17 billion into local markets and reduce the upward pressure on interest rates.
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