Sri Lanka private credit slows in December 2015, no monetization

ECONOMYNEXT – Sri Lanka’s bank credit to private business slowed to 43.6 billion rupees in December 2016 from 91 billion rupees a month earlier, in a month where excess liquidity was withdrawn by authorities.

Central Bank credit to government, or the stock of printed money, fell to 229.9 billion rupees in December from 268.5 million rupees as the central bank conducted active open market operations and withdrew some liquidity from the banking system in December.

There was no new credit to state enterprises with the outstanding stock flat at 523 billion rupees.

Bank lending to the central government was strong at 54 billion rupees, despite the contraction in central bank credit.

Over the last quarter of 2015, one-year deposit rates also rose around 200 basis points giving a much needed correction to the economy.

In the year to December credit to private businesses and individuals from commercial banks rose 25.1 percent to 3,449 billion rupees, with rupee loans growing 27.3 percent and dollar loans 3.4 percent to 265.5 billion rupees.

Credit to state enterprises rose 17.2 percent to 523 billion rupees.

Credit to the government from the banking system rose 22.5 percent to 1,759 billion rupees in the 12 months to December.

Central Bank credit (printed money) rose 53 percent or 80 billion rupees to 229.9 billion rupees.

However the year end number understates the actual volume of printed money that drove private credit, generated excess imports and wrought monetary mayhem in the economy.

Up to end October, the central bank printed 189 billion rupees, lighting a fuse under the domestic credit system to drive credit and imports (see red line in graph) and scare away foreign investors by undermining the credibility of Sri Lanka’s currency peg.

In September the rupee was ‘floated’ without attempting to curb domestic credit, and the exercise ended up as an old-style devaluation. The rupee has so far fallen from 131 to 145 to the US dollar.

In November proceeds of a 1.5 billion US dollar sovereign bond borrowed by the government was used to cancel over a billion dollars’ worth of central bank credit.

Such one-off transactions (a sterilized forex purchase) while preventing any new domestic credit from the dollar loan and re-building forex reserves, does not undo any of the damage already done from central bank credit created earlier. (Colombo/Mar082016 – corrected 2016)