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Regulatory Actions Taken by the Central Bank of Sri Lanka on The Finance Co PLC

The Monetary Board of the Central Bank of Sri Lanka (CBSL) initiated a number of regulatory actions, as temporary measures, under the provisions of FBA, on The Finance Company PLC (TFC) with effect from 15th February 2019, with a view to safeguard the interests of the depositors and other stakeholders of the company. Regulatory measures include suspension of accepting new deposits, withdrawal of deposits and disbursement of loans and advances to facilitate the restructuring process of TFC.

The International Monetary Fund Releases the Sixth Tranche of US Dollars 164.1 Million Under the Extended Fund Facility

The Executive Board of the International Monetary Fund (IMF) completed the Fifth Review under Sri Lanka’s Extended Fund Facility (EFF) approving the disbursement of the sixth tranche amounting to SDR 118.5 million (approximately US dollars 164.1 million). The Executive Board also approved an extension of the arrangement by one year, until June 2020, and rephased the remaining disbursements.

Sale of Subsidiaries Sub-subsidiaries and Investment Properties of ETI Finance Ltd

The Central Bank of Sri Lanka has taken number of measures on ETI Finance Ltd (ETIF) to address various irregularities taken place since 2011, including severe liquidity constraints faced by the company during the latter part of 2017.

Considering the extremely vulnerable liquidity position of ETIF and its inability to repay the depositors, the Monetary Board (MB) of the Central Bank of Sri Lanka (CBSL)issued directions on 02.01.2018, restricting the operations of the company. Further, based on a proposal submitted by the company, MB gave its concurences on 21.02.2018 to dispose identified subsidiary, sub-subsidiary companies and investment properties of ETIF for a total consideration of USD 75 mn, with the view of repaying the depositors utilising the sale proceeds.

Measures to Reduce Lending Rates and Drive Credit Flows to Small and Medium Enterprises (SMEs) Sector

The Central Bank of Sri Lanka has observed high interest rates charged on lending products and excessively high interest rates offered on deposit products by licensed commercial banks and licensed specialized banks (licensed banks) and Non-Bank Financial Institutions (NBFIs) despite the measures taken to bring down overnight interest rates and enhance market liquidity through the reduction of Statutory Reserve Ratio (SRR). Especially in the context of well contained inflation and inflation expectations, Sri Lanka’s interest rates in real terms also have been found to be excessive in comparison to other regional economies.

Accordingly, the Central Bank has requested licensed banks and NBFIs to reduce interest rates on deposits to accelerate monetary policy transmission through the financial sector, enabling licensed banks to reduce their interest rates on lending products in general, and to SMEs in particular, and thereby enhance credit flows to the real economy.

The Annual Report of the Central Bank of Sri Lanka for the Year 2018

The vulnerability of the Sri Lankan economy to global and domestic disturbances became increasingly visible in 2018, with a modest expansion in real economic activity amidst a low inflation environment during the year. Real GDP growth was recorded at 3.2 per cent in 2018, compared to 3.4 per cent in the previous year. This growth was largely supported by services activities that expanded by 4.7 per cent and the recovery in agriculture activities, which recorded a growth of 4.8 per cent. Industry activities slowed down significantly to 0.9 per cent during the year, mainly as a result of the contraction in construction. According to the expenditure approach, both consumption and investment expenditure supported growth. Investment as a percentage of GDP stood at 28.6 per cent in 2018 compared to 28.8 per cent in the previous year, while the savings-investment gap widened during the year indicating increased dependence on external resources to fill the shortfall.

Inflation in March 2019

Headline inflation as measured by the year-on-year change in the National Consumer Price Index (NCPI, 2013=100) increased to 2.9 per cent in March 2019 from 2.4 per cent in February 2019 mainly due to the low base prevailed in the corresponding month of the previous year. Meanwhile, in March 2019, year-on-year Food and Non-food inflation recorded -2.3 per cent and 7.1 per cent respectively.

The change in the NCPI measured on an annual average basis remained unchanged at 1.7 per cent in March 2019.

When monthly change is considered, the NCPI declined by 0.2 per cent in March 2019 with the decrease observed in the prices of the items in the Food category, particularly that of rice, coconut and vegetables. However, within the Non-Food category prices of the items in Alcoholic Beverages and Tobacco; Transport (petrol and diesel); Clothing and Footwear; and Miscellaneous Goods and Services subcategories increased during the month.

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