Economists hail bank rate reduction

Lakshmi DE SILVA

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 go up.

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, she noted.

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.