Sri Lanka private credit negative in July, government borrowings up

Sri Lanka July credit

ECONOMYNEXT – Sri Lanka’s credit to private sector was a negative 3.3 billion rupees in July 2019, sharply down from a 63 billion surprise spike in June, while state borrowings from the banking system continued, official data showed.

Private credit grew 7.7 percent from a year earlier to 5,603.8 billion rupees by end July 2019, down from 5,605.0 billion rupees in June., data from the central bank showed.

Sri Lanka’s private credit turned negative in 2019, after the rupee collapsed from 153 to 182 to the US dollar in 2018, when the central bank printed money to target a call money rate just as the economy recovered from a previous balance of payments crisis.

The central bank is operating a so-called flexible exchange rate, where the rupee is pegged to collect forex reserves and preventing appreciation, then unsterilized liquidity is kept for a extended period of time.

Then new money printed through multiple lender of last resort facilities in case when there is a pick-up in credit driving up rates, apparently to bring down the call money rate.

The rupee is then floated with excess liquidity.

However up to July, dollar purchases were mopped up. The central bank stopped mopping up inflows in after July 11 and allowed excess liquidity to build up.

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Central bank credit to government ticked up marginally to 344.7 billion rupees in July from 341.4 billion rupees in June.

Credit to government grew 36.4 billion rupees in July on top of a 72 billion rupees in June. Up to May the deficit has been filled mostly by foreign borrowings.

From January to May government borrowings were only 79.5 billion rupees.

But in June and July 103 billion rupees had been borrowed from the banking system.

Credit to government picked up to 21.3 percent in the 12-months to July, from 17.3 percent in June.

Sri Lanka’s import and tax revenues had contracted along with credit, as the rupee collapsed under the flexible exchange rate’.

Sri Lanka also brought credit and restrictions on the import of three wheelers and private cars, which had been filling a gap in transport created by an over-regulated and partly state-run public transport system, as the currency came under pressure from money printing in 2018.

Monetary instability worsened after a political crisis in October sapped foreign investor confidence further. But a total Indonesia-style collapse with high inflation was prevented by tight liquidity analysts say.

State enterprise borrowings contracted 0.9 billion rupees in May to 729.3 billion rupees. Credit to SOEs grew 7.7 percent in the 12-month to July, up from 8.7 percent in June

The central bank in 2019 started an unprecedented program of financial repression involving using the coercive power of the state to deny market rates of return to savers.

Plans have been announced to force down lending rates as well. (Colombo/Sep08/2019)