ECONOMYNEXT – Sri Lanka’s private credit contracted 58.9 billion rupees in August 2022, falling for the third straight month, while credit to state enterprises also fell, central bank data showed as efforts are made to end a balance of payments crisis triggered by mis-targeted interest rates.
Credit to private sector grew 12 percent to 7,612 billion rupees in the 12 months to August down from 15.2 percent a month earlier.
Credit to state enterprises fell 54.2 billion rupees with the stock growing 49.5 percent to 1,699.8 billion rupees by September 2022, down from 53.7 percent a month earlier.
Sri Lanka has market priced fuel and electricity to reduce losses and credit to state enterprises and raised interest rates to curb private credit and investment to stop credit driven outflows and stabilize the rupee. Energy utility losses surge when the currency collapses.
When credit demand goes up, a soft-pegged central bank prints money to maintain its policy rate, injecting liquidity in to the banking system driving up bank credit without deposits usually by purchasing Treasury bills, pressuring the currency.
A soft-pegged central bank s set up from around 1940s onwards usually injects money purchasing Treasury bills after selling foreign reserves to maintain policy rates, injecting into banks what classical economists like David Ricardo called ‘fictitious capital’, preventing the automatic correction of balance of payments.
The central bank may also buy Treasury bills directly to finance the deficit and suppress Treasuries yields.
When private credit contracts after interest rates are corrected, banks and the public buys Treasury bills and bonds allowing a larger deficit to be financed.
Credit to government from banks went up by 163.7 billion rupees in August. Sri Lanka has raised taxes in a bid to reduce government borrowings and limit money printing.
Central bank credit (printed money) expanded 47.2 billion rupees in August down from 169.8 billion rupees in July. (Colombo/Sept03/2022)