Financial Times

Hold dollar at Rs 115-President

During meeting with bankers

Commercial banks must cut interest rates, increase lending and contain the US dollar at Rs 115, President Mahinda Rajapaksa told bankers and government officials at a meeting on Tuesday.
Discussing the country’s economic and financial situation, the President asked why the banks were not cutting rates and hinted that if this doesn’t happen in coming days, the authorities would take steps to ensure this. He said the dollar should be contained at Rs 115 (per dollar) otherwise it could affect the cost of living.

The Central Bank has cut rates and urged commercial banks to follow suit. According to bankers present at the meeting, the President has said credit growth was low and banks were not lending in the market. Banking analysts said that banks were reluctant to lend due to the high risk of default by borrowers – given the economic crisis and overseas developments.

CEOs of all banks and chairmen of local banks were invited for the meeting in which Ministers Sarath Amunugama and Ranjith Siyambalapitiya, Central Bank Governor Ajith Nivard Cabraal and Presidential Advisor Basil Rajapaksa were present.

The President referred to low interest rates charged by some banks (in the market) and asked why the others could not follow suit. Bankers present said the President was referring to prime lending rates (to best customers) which is not an accurate reflection of general interest rates. “The President unfortunately has not received proper advise on this issue,” one participant said.

The President is also reported to have said that even if the IMF’s $1.9 billion standby facility doesn’t come, the country can manage with its resources. He referred to the $500 million loan from Libya and noted that the government has secured a year’s postponement in an oil payment. “It is easier to manage the war than bankers,” he had said, jokingly.

Later on Tuesday, Mr Cabraal told a business meeting that there were back up plans (in case of delay in the IMF loan). US Secretary of State Hillary Clinton and British Foreign Secretary David Miliband this week said that the IMF loan would be a contentious issue if the government doesn’t respond to appeals to reduce civilian suffering in the no-fire zone.

At the meeting chaired by the President, Mr Cabraal made a detailed presentation on the economy dealing with key issues like GDP, credit growth and inflation. He said banks were not lending enough although inflation has fallen to a 5-year low, unemployment had also fallen and the external environment was improving.

However, unemployment figures may not reflect the latest situation where, according to the Labour Ministry, there have been an estimated 70,000 jobs losses and 220 factory closures in the year to March-April 2009.

Money market dealers said containing the dollar at Rs 115 would be difficult. “It would most likely trade between Rs 117 and Rs 120 in coming weeks,” one dealer said.

The dollar however eased this week to Rs 116.50 at the close on Thursday mainly due to less pressure on the currency and foreign banks being awash with dollars. The dealer said there was a lot of dollars in the market believed to be from the UN-related agency funds for humanitarian work.
“There has also been less import demand these days,” he said.


 
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