Sri Lanka bank credit soars above Rs100bn for past three months

ECONOMYNEXT – Sri Lanka’s credit from the banking system has soared above 100 billion rupees a month for three months till November 2018, with heavy money printing and a reserve ratio cut expanding the ability of banks to give loans, official data showed.

In the three months ending November total credit from the banking system including central bank credit, totaled 528 billion rupees, not counting tens of billions of rupees of cash dumped into the system through a reserve ratio cut.

In the preceding eight months to August only 654 billion rupees were loaned.

Bank credit surged to a high of 278 billion rupees in September 2018 with over 122 billion rupees printed mostly to sterilize a maturing legacy swap dating back from 2013, when the central bank started taking on quasi-fiscal risks.

Bank credit was also high at 94 billion rupees in August, when new money was created in to the banking system through new Soros-style rupee/dollar swaps between the central bank and finance ministry, after a run on the rupee created by earlier money printed ended.

In October a total of 114 billion rupees was loaned to private borrowers, the government and state enterprises, with 49.1 billion rupees being printed.

When money is printed for whatever reason – to sterilize forex interventions, keep rates down, or finance the government – banks are able to give loans or buy bonds over and above the deposits they raise, putting pressure on the rupee and generating deficit in the balance of payments in a soft-pegged exchange rate regime.

In November 135.1 billion rupees was loaned through the banking system, but printed money appeared as only 19.1 billion rupees.

But the central bank in that month, dumped an estimated 90 billion rupees in to the banking system releasing cash that was previously tied up as statutory reserves, cutting the SRR rate.

A cut in the SRR rate allows banks to loan a higher proportion of their deposits to customers.





In December there is a real increase in the monetary base, for which new money is printed each year, which can put pressure on the currency in the following month, as the cash in circulation comes back to the banks, unless mopped up quickly to tighten the system, as happened in May 2018, analysts say.

However in times of currency pressure, there is already a liquidity shortage, and any cash coming in the banks, will reduce a liquidity short and loosen the system.

Sri Lanka spent 519 million dollars in currency defence in November, according to official data.

Sri Lanka operates a soft-pegged exchange rate giving de facto convertibility undertakings in multiple ways including a real effective exchange rate peg, a commitment to stop a ‘disorderly adjustment’ of the exchange rate, and rupee dollar swaps.

While operating a peg, the central bank runs a de facto inflation targeting regime – as if it was running a floating exchange rate – and cut rates when credit picks up, claiming inflation is low, generating balance of payments trouble, critics have pointed out.

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