ECONOMYNEXT – Sri Lanka’s private credit will expand 12-13 percent in 2020, helped by lower interest rates, Central Bank Governor W D Lakshman said, amid tax cut which may also put pressure on credit to government.
“Growth of credit to the private sector is expected to pick up to around 12-13 per cent by end 2020,” Governor Lakshman said, presenting a road map for policy in the coming year.
“This is sufficient to support a revival of economic activity.”
In the 12-months to November 2019, private credit grew only 4.4 percent, in the wake of a currency collapse in 2018 triggered by the highly unstable soft-pegged exchange rate operated by the monetary authority.
Monetary instability from the soft-peg that generates ‘foreign exchange shortages’ and currency collapses, which in turn keeps nominal interest rates has become of the key economic problems in the country over the past 70 years analysts have said.
With a revival in private sector credit, broad money will grow 14 percent in 2020, Lakshman said.
In the 12-months to November broad money only grew 6.1 percent down from an orginal forecast of 15 percent.
“Driven by the expected growth in private sector credit, growth of broad money supply is likely to reach around 14 per cent by end 2020,” Lakshaman said.
“This is not expected to cause any excessive build up of demand pressures with adverse impacts on inflation.”
In 2018, the central bank triggered the currency collapse with private credit growth of 15.9 percent, which was around the forecast of 15.9 percent, and broad money growth of only 13 percent.
Analysts have shown that excess liquidity injections of a single month, to target the call money rate, can trigger a run on the currency when private credit picks up.
Bank lending rates have been brought down in 2019, Governor Lakshman said, though nominal interest rates continued to be high.
The central bank also slapped price controls, which will be reviewed,he said.
Analysts have warned nominal interest rates will remain high in any country lacking monetary stability and has a permanently depreciating currency.
In 2019, state revenues fell in the wake of the collapse of the currency, but the higher deficit, did not put fresh pressure on rates due to weak private credit.
However there are fears that state credit will also pick up in 2020, after value added tax was slashed from 15 to 8 percent by the new administration.
Governor Lakshman however said the government expects to cut current and capital spending to keep the budget deficit on track.
“Any revenue shortfall due to the changes in taxes announced recently is expected to be largely offset by action taken to eliminate unproductive current expenditures and to prioritise capital expenditures,” Lakshman said.
“It is expected that the fiscal consolidation path remains intact and the level of public debt stock remains sustainable.” (Colombo/Jan06/2019)