Sri Lanka bank credit, state borrowing surge in Dec 2019

ECONOMYNEXT – Sri Lanka’s credit from the banking system to the central government and state enterprises had surged in December, while private credit had also spiked, taking total credit to level seen during the last currency crises, official data show.

Private credit had grown 57.9 billion rupees in December, up from 47.1 billion rupees, just as the government slashed taxes in a bid to ‘stimulate’ the economy.

Private credit has been positive since August 2019.

The total in December went up to 5,811 billion rupees up 4.4 percent from a year earlier.

Credit to government grew to 65 billion in December ending government credit contraction seen in the previous three month. Reduced state borrowings allow private sector to borrow and rates to fall.
Higher state borrowings will pressure interest rates and ‘crowd out’ private investment.

The central bank had also printed 30.6 billion rupees in December, data show. In December there is an increase in real demand for cash, as customers withdraw money for the Christmas and New Year holidays and buy more goods.

But the central bank over-injected cash until banks deposited 53 billion rupees in excess cash at the window on December 26.

Analysts had warned that over-issue of money, in April and December, tends to pressure on the currency in later weeks, if credit demand is strong.

Some of the excess cash was withdrawn in January, data show.

In January the central bank cuts its policy rates by 50 basis points and is printing money in to the banking system at around 7.00 percent instead of 7.55 percent, just as credit pressure seems to be building up.

Meanwhile state enterprises also borrowed another 15.2 billion rupees in December, taking the total to 802.8 billion rupees.

Sri Lanka has suspended a monthly pricing formula for fuel, and the Ceylon Electricity Board is also running up credit, after the central bank depreciated the currency from 131 to 182 to the US dollar, a coal plant was cancelled, and the sector regulator failed to give a tariff hike.

Total credit from the banking system, soared to 138.1 billion rupees in December 2019 from a net 34 billion rupees in November. The central bank bought dollars on a net basis in November.

There had been marginal net sales in December. Total credit from the banking system to state and private borrowers soared to 138.1 billion rupees, up from 34.4 billion rupees in November, the highest since June 2019, when state borrowings spiked to 72 billion rupees.

During the currency crisis in later 2018, total credit had spiked over 120 billion rupees a month, largely accommodated by central bank credit. (Colombo/Feb05/2020 – Update II)