By Yakuta Dawood
Recently, the Central Bank of Sri Lanka (CBSL) imposed a maximum interest rate of 5% for foreign currency deposits of licensed commercial banks (LCBs) and National Savings Bank (NSB).
This topic is important because this CBSL measure will now eliminate the interest rate anomaly that prevailed in the domestic market between interest rates offered by banks on foreign currency deposits and rupee deposits.
Responding to our email query, CBSL Secretary to the Governor Erandi Liyanage stated that by this implementation, CBSL expects that it will encourage more foreign currency earners to convert their receipts into rupees, thereby contributing to further improve foreign currency liquidity in the domestic foreign exchange market.
Before the implementation of a 5% ceiling on exporter dollar deposit rates, the interest rates offered on foreign currency deposits by domestic banks were observed to be much higher than their corresponding international average interest rates, while some banks were offering rates even higher than the corresponding rupee deposit rates.
“This anomaly affected foreign currency liquidity in the domestic forex market, as foreign currency earners preferred to hold foreign currency, given the higher returns. In this context, the purpose of this measure was to address the above interest rate anomaly between foreign and domestic currency deposits,” Liyanage mentioned.
Releasing a press release with regard to this subject, CBSL, on 24 August, stated that the maximum interest rate offered or paid by an LCB and NSB on all foreign currency deposits shall not exceed an annual effective rate of up to 5%. However, in the case of special deposit accounts (SDAs), the interest rate can be above this rate.
Local banks’ response
The Sunday Morning Business spoke to several commercial banks to get their expertise on this timely subject. Speaking to us, Commercial Bank of Ceylon PLC Chief Financial Officer (CFO) Nandika Buddhipala stated that the effectiveness of this measure will depend on how consumers are going to take it up, their speculative perception, the availability of the dollar, and the interest rate preferential in the rupee and the dollar.
“It is a bit too early to comment on the effectiveness of this implementation. We will have to wait and see the behavioural pattern of how consumers will react to this, because there will be people with different objectives, perceptions, and ways of thinking,” Buddhipala explained.
He stated that since the exchange rates are depreciating compared to what it was earlier, the customers who have savings in dollars or any other currency terms would now start to welcome this implementation initiated by CBSL.
We also spoke to Bank of Ceylon (BOC) Chief Manager – Treasury Nadira Jeewantha who stated that this is a good move by CBSL, since it will keep the deposits, especially of export earners, in one bank, rather than them constantly switching their deposits from one bank to another depending on the rate of return.
“All banks will now have the same interest cap for foreign currency deposits, meaning it will help one bank to keep their deposits rather than allowing exporters to transfer cash into other banks that have a high interest rate,” Jeewantha said.
Expressing similar views, BOC Deputy General Manager – Corporate and Offshore Banking W.N.P. Surawimala also stated that this is a good move by CBSL, as the industry did not benefit prior to this implementation.
However, Sampath Bank was not able to comment at the time of going to print, and all attempts to reach People’s Bank and National Development Bank (NDB) proved futile.
Other policy measures implemented by CBSL
With the view of addressing the imbalances in the external sector, CBSL on 6 August decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points each to 5.00% and 6.00%, respectively.
Along with that, in order to tighten the Monetary Policy Stance, with effect from 1 September, the Monetary Board increased the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of LCBs by 2.0% points to 4.00%.
“The Board expects these monetary policy decisions to iron out the prevailing imbalances in the domestic financial markets and the external sector of the economy, while preempting the build-up of any excessive inflationary pressures over the medium term, thereby supporting greater macroeconomic stability,” CBSL noted.
With regard to the interest rate, CBSL stated that due to the low-interest environment in Sri Lanka, credit to the private sector has expanded prominently during the first half of 2021, surpassing the annual expansion of credit observed in 2019 and 2020.
“The upward adjustments in market interest rates and the expected liquidity deficit in the domestic money market would also help the economy to absorb the large amount of currency held by the public observed since the onset of the pandemic in early 2020,” the CBSL report further said.
However, CBSL added that even with limited conversion by exporters and the advancement of imports, together with some speculative activity, prompted by anomalies between interest rates on the rupee and foreign currency products in the financial market that exerted undue pressure on the exchange rate in the domestic market, CBSL was still able to meet all debt service obligations of the Government on time, including the settlement of the International Sovereign Bond (ISB) of $ 1 billion in late July 2021.
With reference to…
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