Thread by @ChayuDamsinghe

Let me explain why interest rates moving up, at this stage, is very good news.

#SriLankaEconomicCrisis #IMFNow

(1/15)

First - rates themselves. You'll hear a lot of different types of rates, but rates move together mostly - so can think of 1 rate. Essentially, it's the rate at which you'll get money from a bank if you save or the rate at which you'll have to pay loan interest back.

(2/15)

So interest rates were kept low for a while now, and we started moving up late last year. Low rates leads to easy loans for people and companies, more money in the economy, and more consumption.

(3/15)

When people have cheap housing loans, they buy more imported cement, steel, etc for construction. Similarly, consumption means more raw materials, machinery, and yes, even consumer goods. This leads to more imports and therefore, money flowing out from the country.

(4/15)

So rising rates counters this somewhat, by reducing the ability and incentive to import + finance imports.

So slowing down import growth in lnon-essentials or even contracting it, means less money going out=more money available to finance essentials like food and fuel.

(5/15)

But that's one part only.

Rising rates also mean that companies who have dollar earnings, but keeping money outside because they want a better LKR level, now can't borrow locally and do things as easily. This means they're more inclined to bring those dollars back.

(6/15)

The next way this helps, is by giving a good rate locally for people to invest in. Anyone who has dollars will now be given a better return if they save in Sri Lanka (bills, bonds, deposits). So it's possible that they bring some money this way - though maybe not a lot.

(7/15)

The final way this matters, is by showing confidence. Sri Lanka has been doddering along, not doing anything much, and now we're finally taking strong action. This sends a powerful signal and builds confidence that SL is finally starting to act instead of hope.

(8/15)

The combination of these factors helps support the currency, reduce the rate of depreciation, encourage more dollars within system. This means urgent essential needs have more dollars to be met with. It also reduces increase in depreciated costs - tempering inflation too.

(9/15)

What about every other loan?

Existing loans should be broadly okay, since most loans are on fixed rates, they won't change, only those on floating rates or new loans would.

Savings and deposits would do better, and that's good for the majority that have those.

(10/15)

But interest rates, overall are needed to "expansion" of the economy. There is no growth with high rates.

In fact, if there are firms needing refinancing of their debt, they'll suffer. Many will have to rework their debts. There will likely be unemployment too.

(11/15)

That's the catch. The actions moving forward are tough. But the thing is, it's worse now.

Right now, we have power cuts, no food, no gas, no medicine. Forget the socioeconomic catastrophe for a moment. Nothing is growing now.

(12/15)

Powercuts, no food/fuel. Far more companies are going to suffer if this continues. Far more people are going to be unemployed. Far more people, frankly, are going to die.

Raising rates is better. Going for "growth" when all this is happening on the ground is ludicrous.

(13/15)

Because this is so bad, we will eventually need to hike rates. The earlier we do it, the smaller we need to do it by. If we moved fast last year, smaller hikes, better results. Today, it's harder. If we wait, even a few weeks, much much harder.

(14/15)

Why I'm so positive on this action is because we're acting now. The new governor has already sent a strong signal he's taking this seriously. That means we have hope, that actions will be taken to avoid the worst of what could happen.

I hope these actions continue.

(15/15)

Addendum: One thing that I missed making clear - interest rates also mean money gets pulled out of circulation, as people save money with good bank rates.