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Sri Lanka bank credit falls in November with sovereign bond

ECONOMYNEXT – Credit from Sri Lanka’s banking system to the government fell in November 2016 with the proceeds of an international sovereign bond coming into the country, though private credit continue to soar, official data shows.

Outstanding loans from rupee banking units of commercial banks to the state fell from 1,108.8 billion rupees in October to 1,067.6 billion rupees in November.

Central Bank credit outstanding also plunged from 338.8 billion rupees to 268.5 billion rupees, as Treasury bills were repaid with sovereign bond proceeds in a permanent sterilization action.

When liquidity generated from dollar purchase by the central bank (or liquidity that will be potentially created from a dollar conversion) is withdrawn from the domestic banking system by settling central bank held securities, no domestic liquidity is generated for consumption or credit.

As a result the dollars will be locked up in forex reserves until some fresh money is printed and additional import demand is generated.

Money however continued to be printed during the rest of the month, with Treasury bills being repaid each week with central bank credit after the November 04 sterilization exercise.

Foreign reserves recovered to 7.29 billion US dollars in November from 6.48 billion dollars in October.

When liquidity is created either through the purchase of domestic assets (Treasury bills), or foreign assets (dollars), the rupee will fall unless the liquidity is mopped up in forex markets through currency defence when they turn into imports through domestic credit.

Credit to state owned enterprises also eased to 257.5 billion rupees from 255.5 billion rupees.

But private credit rose by 91.40 billion rupees in November, the third highest monthly volume in the history of Sri Lanka after the all-time high of 158 billion in credit reached in October and 87.3 billion rupees disbursed in September.

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At least part of the credit is believed to be for vehicle loans.

Car sales which picked up amid low interest rates and a steep salary increase to state workers which pushed up disposable income, surged in the run up to the November budget in a so-called ‘announcement effect’ as import taxes were expected to be raised.

Private credit grew 27 percent in the year to November 2016, up from 26.3 percent in October. Loans from rupee banking system rose 29.3 percent in the 12-month to November from 28.2 percent a month earlier. (Colombo/Feb 01/2016)

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