Source : Lbo :05 Dec, 2011 09:45:40
Sri Lanka's non-bank finance companies should borrow abroad to increase resources they have to lend to the domestic economy, Central Bank Governor Nivard Cabraal said.
"We need new money coming into the country if we are going to achieve this growth that we are targeting," Cabraal told a forum of non-bank lenders in Colombo.
"We cannot do it with only the savings that we have in our own country."
Cabraal said the state has borrowed abroad and set a benchmark for private borrowers to go to international markets.
Leading the way
"Every time we go the market - mind you this is the government that is going to the market - we are telling them that the private sector is coming in and they will raise their own funds from international markets," Cabraal said.
"But I am sorry to say that although the government has been doing that the private sector has been slow to reach out to international markets.
"They are very quick to go right across the country in their nice T-shirts and to raise deposits but are very slow to go to the rest of the world in order to have new money coming into the country."
"We need new money coming into the country if we are going to achieve this growth that we are targeting. We cannot do it with only the savings that we have in our own country."
Sri Lanka is projected to grow at 8.3 percent in 2011. But strong credit growth has put pressure on the island's soft-dollar peg.
Unlike a hard peg which only targets an interest rate, a soft-dollar peg attempts to target both the exchange rate and keep low interest rates at the same time leading to high inflation, balance of payments crises or both.
In the 1980s amid high deficit spending and loose monetary policy, the currency was continuously depreciated to avoid balance of payments crises.
When foreign currency deposits are allowed it lead a build-up of forex holdings, a phenomenon known as deposit dollarization.
When the management of a soft-peg to improve a little and there is a period of exchange rate stability, domestic participants may be incentivized to borrow abroad due to interest rate differentials.
Liability Dollarization
The phenomenon known as 'liability dollarization' can result in large losses to borrowers when a soft-peg eventually breaks. A soft-peg breaks either because of outright deficit financing of the state by central bank credit or due to delays in allowing rates to move up.
But if exporters in particular, who have access to forex revenues can be encouraged to borrow in foreign currency, it could help temper continuous calls to depreciate the currency.
Classical economists have said that currency depreciation and inflation is the key tool states have to impoverish large populations.
Though Sri Lanka's monetary policy improved from 1995, the peg has experienced major balance of payments troubles episodes in 2000/2001 and 2008/2009 and less intense problems in 2004 and 2007.
In 2011 the peg has again come under pressure following a build-up of excess liquidity from foreign borrowing and delays in raising interest rates, analysts say.
Cabraal says banks have already begun to borrow abroad.
"We have asked the banks to do that, we've e seen the banks responding quite effectively," he said.
"Today they realize what strengths they have and that is important. I think some of the finance companies also have the strength to raise capital from outside. You need to do that."
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