Sri Lanka’s main financial regulator Tuesday ordered local and foreign banks to slash lending rates in an unprecedented move as the economy struggled to recover from the Easter attacks.
The Central Bank of Sri Lanka said it ordered all commercial banks to reduce lending rates by a minimum of 200 basis points within three weeks.
It comes weeks after the government complained that lending rates had not kept pace with sharply lower deposit rates that fell by over 250 basis points since the April attacks, when hundreds were killed in suicide bombings.
Banking experts said it was the first time since the inception of the central bank in 1950 that it had resorted to imposing a mandatory ceiling on lending rates.
Average lending rates are currently around 13 to 15 percent, while the country’s inflation had slowed to 2.2 percent in July.
Last month the Central Bank cut its main lending rate for the second time in three months, hoping to help the struggling economy.
The Central Bank said the rate at which it lent to commercial banks was reduced by 50 basis points to 8.0 percent, and added that the 50-basis-point cut in May had not translated into cheaper credit for consumers.
Sri Lanka’s economic growth slowed to 3.2 percent last year, but it had been expected to pick up in 2019 – until the devastating attacks by a homegrown jihadist group.
The finance ministry expects growth to be around 3 to 3.5% this year as the tourism sector made a faster than expected recovery after the Easter bombings.
Revenues from tourism -– one of the country’s biggest streams – were expected by the finance ministry to plunge $1.5 billion this year because of cancelations by foreign tourists after the bombings, but the industry anticipates a much smaller drop.
The International Monetary Fund released a delayed loan installment to Sri Lanka following the bombings, helping government efforts to stabilize the economy.