On the face if it, President Rajapaksa’s directive to state banks that they substantially reduce loan interest rates could have happy ripple effects on the economy in that they could prove a major stimulant to growth. But such expectations could be easily defeated if effective economic management is not exercised by the state from now on.

The entrepreneurial stratum is bound to welcome the lowering of interest rates on loans but what of the majority of the people who lead a hand-to-mouth existence and who try to scrape through on their meagre earnings? This is a poser for the government which should not go unaddressed. The issue is compounded by the fact that a considerable number of people, particularly senior citizens and pensioners, depend on monthly interest on bank deposits to endure the hard grind of a life led in virtual penury. What is the guarantee they could do this now that banks would be forced to lower interest rates on individual savings instruments, such as Fixed Deposits, for the purpose of balancing costs?

Besides, banks should now expect a reduction in the quantum of deposits by the public in view of the relatively poor returns on these instruments. In the event of this happening how are banks expecting to remain financially stable? There is likely to be a slide in the interest rate on Treasury Bills, and these instruments as keys to state revenue-raising would not prove as dependable as before.

These are posers that impinge very closely on effective economic management and we hope the state is alert to them. The state is on record that it was influenced on the interest rate decision by the considerably reduced inflation rate. However, the inflation rate is a very fickle thing as could be gauged by the news that inflation is picking-up once again in the wake of rising local food production costs coupled with price rises in imported food items.

Therefore, there are no visible compensatory benefits for the ordinary people at the moment from the government’s efforts to make loans less costly, unless it ensures that the latter measure translates into increased food production in particular. This could be brought about only through sound incentive packages to food producers, for they are unlikely to put their money in the production of essential necessities unless they are assured of the profitability of such initiatives.

The opposition has taken-up the cry that the decision on interest rates is a mere election ‘gundu’ by the government and it may appear to be very much the case if the ordinary people do not gain by the measure.

The importance of meeting this requirement could be seen in the fact that, regardless of what the government may say, meeting living costs is continuing to be a harrowing nightmare for most people. The unpredictability of price changes in most essentials bears this out. If the government is to prove its critics wrong, it would need to ensure that the perceived positive outcomes from the interest rate reduction benefit the ordinary people as well.

The most formidable challenge facing the government is to now ensure that the cut in interest rates effectively stimulates the productive sectors of the economy. Interest rate reduction was a measure which was constantly urged by the local business sector over the past couple of years or more in the teeth of the sharp downturn in the local and international economy. Now that Sri Lanka has availed of the $ 2.6 billion IMF standby loan facility and could expect to tide over the foreign exchange crisis which was looming over it and more particularly, now that the war is over, the state has no excuses for not activating and keeping the wheels of the economy humming. In other words, it must ensure that concrete benefits accrue to all through its perceived relief measures to the business sector.

In this connection, the government would need to create a business-friendly environment in the country for particularly small and medium enterprises. This is in view of the fact that these businesses constitute the bulk of the productive sector. For instance, they should be enabled to obtain their loans with the least hassle and bureaucratic delays. They should be provided the facilities to engage in business at an accelerated pace. Needless to say, this sector needs an attractive package of incentives to remain afloat.

In a way, it is the middle class that principally bears the brunt of an economic crisis. Over the years, this class has increasingly sunk into hardships and even poverty as a result of the country’s declining economic fortunes. Most members of this class have been compelled to invest their moneys in financial institutions touting high interest rates. But as the Golden Key tragedy graphically illustrates, this indeed could be a risky proposition.

The rising number of credit card holders is proof, really, of the desperation penetrating the middle class and not necessarily a pointer to increasing affluence. The bottom line is that life styles should be maintained, sometimes by hook or by crook.

What is the guarantee that private sector banks in particular would now lower interest rates on credit cards to alleviate some of the hardships of the middle class? This is an issue which the state needs to address right away.

The state seems to be somewhat complacent about the outcome of the current deliberations on the country’s GSP+ concession. We advocate that the state be prepared to face some rough times on this score. Nothing could be left to chance and the attitude could not be taken that ‘things would shape-up’.