The International Monetary Fund has said a suspension on parate execution, or halting foreclosure decisions taken by banks in Sri Lanka on bad loans, should be ended as soon as possible.
Sri Lanka bank non-performing loans went up as much as 13 per cent, with a combined hit from a currency crisis which came on top of the Coronavirus pandemic triggering a slew of auctions of collateral of distressed businesses.
“The suspension of banks’ repossession of collateral (“Parate” executions) 22 will hinder the banks’ ability to manage NPLs and price credit risks and should be lifted as soon as possible while encouraging a negotiated NPL solution to avoid excessive liquidation,” an IMF report released after the approval of the latest review of the IMF said.
In Sri Lanka NPLs, spiked after currency crises, which intensified after the end of the civil war and came back-to-back under so-called flexible inflation targeting as attempts are made to target a high inflation level (about 5 per cent) despite not having a clean floating regime.
Under the operating framework, money was also printed to target growth (potential output).
The suspension of parate execution championed by Justice Minister Wijedasa Rajapaksa was one of the state interventions made after the economic crisis.
It is not clear whether the sudden state interventions spooked banks, delaying a recovery in credit.
Banks have warned that the suspension of parate execution will keep interest rates higher for all borrowers.
Expanded state intervention after currency triggered by central banks and delays in recovery is labelled the ‘ratchet effect’ by classical economists
The best-known such interventions – also known as regime uncertainty – came during the ‘Great Depression’ of the United States, which delayed recovery by killing investments leading to so-called double dips.
The Great Depression was triggered by the Fed after it invented the bureaucratic policy rate in the 1920s.
IMF programs themselves involve a series of tax and other measures which can jolt economic agents. A hike in income tax rates on top of a currency collapse in the current currency crisis is said to have contributed to a brain drain.
In addition to a policy rate enforced by liquidity tools (standing facilities, reverse repo operations) macroeconomists also started to cut taxes as ‘macroeconomic policy’ gained ground in the last century undermining rule of law, critics say.
Source: Economynext
