ECONOMYNEXT – Sri Lanka’s private credit surged by 83 billion rupees in June 2021, while credit to government surged 170 billion rupees, of which 124 billion rupees were printed, official data showed.
Sri Lanka private credit in the first six months of the year was 414 billion rupees, up from 372 billion rupees a year earlier.
Authorities are expecting private credit of around 800 billion rupees in 2021.
Analysts had warned that rising private credit would expand imports and the trade deficit, as money is channeled into areas which are not controlled by bureaucratic ‘omniscience’ (and may be second best for the individual users and the economy as a whole) overriding the first preference of economic agents.
When loans are re-financed by central bank credit (printed money) there are forex reserves losses when they are redeemed for dollars either in the trade or financial account (debt repayments).
If money was not printed, state debt repayments would be made by ‘crowding out’ private credit at a higher rate of interest, reducing or eliminating forex reserve losses by reducing imports.
Data showed that that in June central bank credit was 124 billion rupees, helping push government borrowings from the banking system of 170 billion rupees.
In June there was outright monetization through Treasury bill purchases by the central bank as well as window borrowings. It is not clear how gross foreign reserves were reported to be the same as in May amid a fall in net reserves.
Credit to state enterprises also grew 19.4 billion rupees.
The June private credit of 83 billion rupees is the highest since the 87 billion rupees in September 2020, when the economy had recovered from lockdowns and the second wave started.
The 83 billion came despite the lockdown. However in June parallel exchange rates surged, and it is not clear whether the credit is due to early import covering and late exporter sales which usually accompany a confidence shock to the soft-peg.
Sri Lanka is operating a non-credible peg at around 203 without monetary policy to back it (floating short term rates) and suffers frequent currency crisis. The exporter and import panic is due to a so-called ‘flexible exchange rate’ where there is very little credibility.
The International Monetary Fund backed ‘flexible exchange rate’ driven by dual anchor conflicts triggered two currency crises in 2015 and 2018 and led to the flight of all capital from rupee debt markets. (Colombo/Aug09/2021)