Spurring growth

Friday, 1 October 2010 01:30 -     - {{hitsCtrl.values.hits}}

Just a little bit more!

“Just a little bit more” is what Central Bank Governor Ajith Nivard Cabraal seems to be saying at the press conference, to announce easing of exchange regulations and reduction of the general provision requirement, that is expected to spur economic growth – Pic by Upul Abeysekera

By Deepal V. Perera

Fresh from the triumph of the US$ 1 billion 10-year Eurobond, the Central Bank yesterday made more overtures to spur economic growth by relaxing exchange rate controls, reducing general provision requirement on loans and launching a deposit insurance scheme.

Central Bank Governor Ajith Nivard Cabraal told the media that the mandatory deposit insurance scheme under the provisions of the Monetary Law Act would come into effect from today (1 October). Accordingly, a new fund – Sri Lanka Deposit Insurance Scheme (SLDIS) – will come into operation with an initial capital of Rs. 1.1 billion provided by the bank.

He was also quoted by Reuters as remarking on the exchange control rates being eased, with reduction of inflation rates that is expected to be below the projected 6% by year end.  “Exchange control relaxation will be implemented soon,” Cabraal told Reuters, but declined to elaborate on the timing and the specific steps to be taken.

Sri Lanka has strict currency controls that limit the expatriation of funds from the country without Central Bank approval and the Government manages the foreign exchange market via two State banks that keep a trading band in place.

The Central Bank had kept the rupee steady at 114.80 to the dollar since mid-May last year before allowing it to trade within a band that has increased to 40 cents.  The rupee has gained 2.2 per cent this year.

“We might change this, but at the moment we think the 40 cents is a reasonable band because we are moving it daily this way or that way.

We will maintain the same strategy when we relax exchange controls,” he said.

The Central Bank also announced it would cut the amount of money it requires banks to keep on hand against performing loans to 0.5% of the total outstanding from the present 1%.

The move is expected to pump Rs. 8 billion into the market. It also began a deposit insurance scheme to guarantee up to Rs. 200,000 held by depositors with seed capital of Rs. 1.1 billion, Cabraal said.

The Central Bank also launched a deposit insurance scheme to protect a deposit portfolio of Rs. 2.3 trillion.

“The setting up of the SLDIS has been a topic that we have been talking for the past 10 years and today we are announcing the setting up of the fund. The main feature of this fund is that all deposits in all banks and all financial institutions regulated by the Central Bank will have their deposits insured under this scheme.”

He  said that a premium  to be levied  on eligible  deposits  that will range between  0.10% and 0.15% per annum and will be required  to be  paid  by member  institutions  on monthly or quarterly  basis. Such premium will be credited to a Deposit Insurance Fund which will be operated and managed by the Monetary Board of the Central Bank.

A special unit has been created at the Central Bank to collect the premiums under this scheme. The new scheme will guarantee deposits to a maximum of Rs. 200,000 per depositor.  While member banks and finance companies will participate in this scheme on a mandatory basis from 1 October 2010, depositors will be entitled to benefits after 1 January 2012.

The Central Bank said that the members of the scheme will comprise all licensed banks and registered finance companies. All deposits excluding deposits of member banks and finance companies, Government of Sri Lanka, shareholders, directors, key management personnel, other related parties, deposits held as collateral against any accommodation granted and deposits falling within the meaning of abandoned property in terms of the Banking Act and dormant accounts in terms of the Finance Companies Act, will be considered as eligible deposits under the scheme.

Consumer prices rise sharply

Reuters: Consumer prices rose more sharply than expected, rising 5.8% in September from a year earlier versus a 5% rise in August, Government data showed on Thursday.

Annual average inflation rose to 5% this month from 4.5% in August, more than forecast in a Reuters poll. Analysts had expected consumer prices to have risen 5.2%, and annual average inflation to have risen by 4.9%.