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Sri Lanka private, CB credit up in June, state down

ECONOMYNEXT – Sri Lanka’s credit to private businesses from commercial banks rose 82 billion rupees in June from 28.8 billion rupees a year earlier, but credit to government had fallen by 51 billion rupees, data from the central bank showed.

Credit to state enterprises also rose 10.9 billion rupees to 619.24 billion rupees.

Credit to the central government fell 51 billion rupees to 2,273 billion rupees, helping keep down total credit from the banking system down to 42.51 billion rupees, from 57.8 billion rupees a month earlier.

Total credit rose to 166 billion rupees in March, and 90 billion in April, including central bank credit, which triggered run on the rupee.

Central Bank credit to government (printed money) climbed 16 billion rupees in June. When the central bank prints money amid strong private or state credit, the rupee will come under pressure and the central bank will not be able to collect foreign reserves.

As pressure from the printed money hits forex markets, the central bank has to sell down its reserves to prevent the rupee falling, or allow the rupee to fall, generate inflation and expand reserve money.

In May the central bank sold 220.85 million dollars to defend the peg and bought 30.75 million dollars and in June 137 million dollars were sold and 10 million dollars were bought, showing that a run on the rupee was winding down.

In August however a run on the rupee has climbed to 43 billion rupees, probably from dollar purchases, though

The central bank started printing money in March, terminating term repo deals as private credit started to pick up.

The central bank missed the International Monetary Fund’s June forex reserve target as expected by analysts after it started to terminate term repo deals in March and resume expanding its balance sheet by acquiring domestic assets.





Analysts had warned that the central bank will find it difficult to collect reserves after January as the agency does not have a tool to mop up excess liquidity long term.

Sri Lanka closed its entire economy in the early 1970s after the Bretton Woods soft peg system collapsed, and is now placing curbs on vehicles. Analysts have called for reform and curbs on domestic operations of the central bank to maintain economic stability.

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