In an effort to encourage commercial lenders to engage in the domestic money markets, the Central Bank of Sri Lanka has implemented restrictions on the use of its emergency liquidity window. Going into effect on January 16th, banks will now only be able to access the Standing Deposit Facility, an overnight deposit that allows for excess liquidity to be parked and earn interest, a maximum of five times per month.
The Standing Lending Facility will also now have a maximum of 90% of its Statutory Reserve Requirement, which allows for the borrowing of money with securities as security (SRR). Currently, 4% of a bank’s deposit base is the SRR. These measures have been put in place in an effort to reduce the reliance of banks on the central bank and to reactivate the domestic money market, which has been nearly inactive in recent months.
The Central Bank of Sri Lanka’s new restrictions on the use of its emergency liquidity facilities is an effort to incentivize commercial lenders to engage in domestic money market activity and to stabilize the nation’s economy, which has been hampered by high-interest rates and inflation. The restrictions also aim to eliminate competition for deposits among financial institutions and to moderate the high-interest rates that have negatively impacted the Sri Lankan economy.
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