ECONOMYNEXT - Sri Lanka's credit to state enterprises soared expanded 46 billion rupees in April and 27 billion rupees in May 2018, which may have contributed a recent balance of payments pressure while, private credit moderated in April, official data show.
In March private credit suddenly surged to 122 billion rupees from 58 billion rupees a month earlier, while credit to government also rose by 32 billion rupees, generating a spike in short term rates.
Questions were raised whether a so-called 'buffer' strategy to repay state debt by borrowing from the banking system played a part in de-stabilizing the credit system.
In March, the central bank had printed at least 36.3 billion rupees, followed by another 29.9 billion rupees in April, leading to not just covering reserve money requirements, but to excess liquidity in money markets.
Currency pressure started in late April and May.
New private credit slowed to just 500 million rupees in April, which is a trend that is usually seen in April. In May private credit has again expanded 28.8 billion rupees, lower than the 50 to 60 billion rupees up to March, when steady private credit expansion was seen.
Borrowings by state enterprises had surged in April by 46 billion rupees, and 27.3 billion in May, ending a long period of credit contraction helped by lower oil prices.
In May Sri Lanka's oil prices were raised, which may help reduce credit expansion to state enterprises and reduce pressure on the rupee.
Last week, a formula base price increases by the Treasury which would have helped stabilize the rupee, was apparently buckled amid speculation that President Maithripala Sirisena or the ministry of petroleum was playing politics.
In December the Treasury cut taxes of fuels, reducing state revenues, which would also have put upward pressure on interest rates. However since fuel prices were raised, secondary market yields on government borrowings have not risen further. (Colombo/July09/2018)