ECONOMYNEXT – Sri Lanka’s private credit from commercial banks was slightly positive for the third straight month in August 2023, while central bank credit was negative, official data shows.
Private credit went up by a marginal 5.5 billion rupees to 7,098 billion rupees, after an expansion of 13.3 billion in July and 58.9 billion in June.
Sri Lanka’s private credit usually contracts after the central bank prints money to enforce rate cuts target ‘potential output’ blowing the balance of payments apart.
The resulting currency crisis from targeting potential output with printed money then triggers a collapse in the rupee along with stabilization measures which leads to an economic slowdown or contraction, a consumption fall (depending on the depth of the currency fall), a rise in the fiscal deficit and the debt to GDP ratio.
The central bank allowed interest rates to market-determine around April 2022 in the latest stabilization exercise and the balance of payments turned positive around September 2022.
It takes around to 18 to 23 months for private credit to recover fully from a central bank potential output targeting exercise, based on currency crises triggered after a civil war ended, analysts say.
In March 2023 the central bank allowed the exchange rate to appreciate amid deflationary policy, giving an immediate boost to recover some of the lost real incomes of workers, deflating trade goods prices including fuel and potentially paving the way to a quicker recovery.
In August, central bank credit to the banking system reduced by 151 billion rupees, amid a cut in the reserve ratio which was partly absorbed by a liquidity shortage in the banking system maintained by the monetary authority.
However, there was a balance of payments deficit in the month, despite the reduction in net central bank credit amid the SRR cut and also a conversion of dollar denominated Sri Lanka Development Bonds into rupees which required banks to collect dollars.
Exchange rate was kept stable with some reserve sales.
Outside of the fall in central bank credit, commercial bank credit to government went up by 86 billion rupees.
Credit to state enterprises continued to decline by 6.2 billion rupees. SOEs still owed 1,087 trillion rupees to commercial banks. (Colombo/Oct08/2023)