Sri Lankan sMEs struggling with ‘Unaffordable’ interest rates

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The rising market interest rates scenario prevailing across Sri Lanka today is having a severe negative impact on the Small and Medium Enterprises (SME) sector, experts told Finance Today.

Given the current situation, market lending rates are likely to rise to 25-30 per cent per annum in the next few months.

They say it is difficult to service loans at such high interest rates and run a business with an acceptable profit margin.

When inquired about this, the official of the Central Bank of Sri Lanka (CBSL) said that the current situation is temporary.

They said, the tendency is to reduce interest rates as the current inflationary pressures gradually erode as aggregate demand declines in response to rising prices.

 “The monetary board of CBSL’s recent decision to Increase the interest rate by 700 basis points was much worse than the delayed decision to float the dollar,” several small and medium enterprises told Finance Today.

With the Dollar decision, the exchange rate moved up from Rs 197 to Rs 340 with the black market rate at around Rs 400.

“Let us evaluate the collateral damage that would result in the newest endeavour of an increase in interest by 700 basis points which is unprecedented in the annals of Central Banking.

Look at the SMEs of this country which contribute more than 50% of the GDP, which had been cushioned by the CBSL from 2020 January onwards until the present fiasco.”

In January 2020, the CBSL announced the “Credit Support scheme to accelerate economic growth” and in March 2020 “Relief measures to assist Covid -19 affected business” with special focus on SMEs was introduced.

The Average Weighted Prime Lending Rate (AWPLR) was managed for the struggling SMEs to breathe with assistance by way of moratoriums, the order of the day.

According to them the sudden provocative decision to increase the rate of interest by 700 basis points will result in an escalation of interest on outstanding advances pushing the business operations of SMEs to a point of no return.

In consequence to the CBSL’s recent policy rates hikes the Weekly AWPR for the week ending 22 April 2022 increased by 314 bps to 14.20 per cent compared to the previous week.

Therefore, the resultant situation will be much worse than the floating of the dollar, they said.

“The CBSL is practising the well-known economic theories without referring to the current status of the country. The SME’s went through Covid-19 with much difficulty and now it will be a rabid economic fallout. Will it be a case of Covid-19 to rabid?,” they questioned.

According to experts, whatever the outcome the central bank has to take cognizance of the following facts: As the economic situation had worsened, extend the moratorium until September 2022 to be on par with the Tourist industry, If the CBSL is rigid and stubborn not to reverse the decision the prevailing rates of interest for SMEs to continue, Provide assistance to SMEs who were affected by the upsurge of the exchange rate pertaining to imports where upon the initiation of an LC on extended credit terms the rate had escalated during the interim period.

They also emphasised that if not the resultant scenario could be as follows:

1. The SME contribution to the national economy will decline drastically and the worst situation will be a negative growth.

2. Due to the inability to service the loans at high interest rates as well as a situation where capital repayments cannot be made if the banks resort to parate action the resultant situation could be summarised as follows:

a. The SME operations will be severely affected resulting in retrenchment of staff etc.

b. The banks will have to convert themselves into real estate business houses to sell properties acquired.

c. If the affected SMEs seek time through court intervention by way of injunctions, etc. the Banks will have to face serious consequences due to impairment provisions.

The parting remark is that the high level decision-makers at the CBSL should throw away the general theories of economics and resort to practical solutions based on prevailing country situation.

By Ishara Gamage