Economists hail bank rate reduction
The Government decision to lower the interests by State banks aims to
channel the credit liquidity to the private sector enterprises and to
stimulate the private sector, economists told the Daily News yesterday.
Senior economist Professor Buddhadasa Hewavitharana told the Daily
News that the lower interest rates would encourage the private sector
for further investment to enhance economic growth.
He said the banks have attracted a large sum of deposits because
people who deposited savings in finance companies pulled out their
monies and invested in banks. Now the banks have high liquidity, but the
banks in turn had invested the monies in Government securities and in
treasury bills. But with the new loan interest rates the private sector
economic activities would increase.
Kelaniya University Economics Department Head Dr. Ajitha Tennakoon
said lowering loan interest rates would stimulate national economic
growth and combat global recession and this was the first change since
the downturn in 2007.
Interest rates have gradually declined in response to the monetary
policy relaxations of the Central Bank and it was a global trend.
Therefore, it is expected to promote credit utilization of the
private sector and thereby enhance performance, she said.
“When we talk about economic development this was a very important
decision taken by the treasury and the Government to create an
investment friendly environment. We expect that the investments would be
expanded in the fields of agriculture, tourism, construction, livestock,
fisheries, small and medium scale enterprises and especially
infrastructure,” she said.
But the problem is our commercial banks are not willing to lend money
to the public sector rather than the private sector because of lower
interest rates. Yet for development purposes private investment should
Therefore commercial banks should bear the risk supplying loans to
the private sector and encourage their investments if they want to be
part of the development of this country. In economics terms if there is
high risk there is high profit. So the banks should take this
opportunity to encourage private investments on development activities,
Regarding saving depositors they would get a lower interest income.
But you have to think of the real interest rates. That means difference
between the nominal interest rates and the inflation rates of the
country. If we have a lower inflation rate then those who save get the
same income from the lower interest rates as previously since the real
interest is high, Dr. Ajitha said.
Head of Economics Department Colombo University Dr. Athula Ranasinghe
said when the interest rates were reduced it was the Treasury that had
used its authority but normally it was the Central Bank.
This strategy was designed to encourage the private sector to invest
in the stock exchange and in Government securities. The implication on
those who save was when the interest rates were lowered such people will
borrow more and invest in less profitable investments.