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Sri Lanka private credit tumbles in April 2020, more money printing

ECONOMYNEXT – Sri Lanka’s private credit has tumbled in April 2020 to 13.4 billion rupees from a spike to 120 billion rupees in March while money printing expanded and the rupee fell to record lows, with total credit numbers still high, official data show.

Sri Lanka injected 165.9 billion rupees of central bank credit in March and another 92.5 billion rupees had been injected in April, totaling 257 billion rupees in the two months.

However officials had said only 140 billion rupees had been drawn down from the system during a Coronavirus crisis, the over-issued money ended up as excess liquidity.

The central bank has to sell dollars to mop up the excess rupee by selling dollars as they are used in credit and end up in forex markets, triggering a ‘foreign exchange shortage’ to prevent a fall in the exchange rate.

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The rupee fell close to 200 rupees amid insufficient currency defense after the latest bout of money printing. In May the rupee has stabilized. Credit data from May has not yet been released.

Sri Lanka has also slapped import controls after money printing and forex shortages also triggered a downgrade of credit amid fears of inability to repay foreign loans.

Private credit surged in March 2020 but collapsed in April amid Coronavirus curfews, data show.

Rupee denominated loans to private borrowers grew only 4.1 billion rupees.

Dollar borrowings were shown to grow to 465.6 billion rupees from 456.2 billion rupees amid a collapse of the exchange rate.

The end month exchange rate was given as 192.85 rupees up from 188.1 rupees a month earlier.

Meanwhile government rupee borrowings from banks grew by 27.5 billion rupees to 2,219.8 billion rupees but dollar borrowings fell.

Sri Lanka Development Bond auctions have been under-subscribed in recent months.

The government can use the printed money in several ways to increase demand and put pressure on the currency or otherwise de-stabilize the economy. Any rupees printed to buy Treasury bills at auctions go directly to the Treasury to spend.

Money printed through overnight reverse repo auctions, or liquidity windows can be given to the Treasury as overdrafts from state banks. All banks or primary dealers can also buy bonds from primary auctions using printed money.

Meanwhile, credit to state enterprises surged by 65 billion rupees to 934 billion rupees in April on top of a 35 billion rupee spike in March. The increase came from dollar borrowing which surged to 412.9 billion rupees from 369.4 billion rupees.

State enterprises have large dollar borrowings partly due to unhedged dollar loans taken by the Ceylon Petroleum Corporation as the rupee fell, which have been dubbed ‘Nick Leeson’ operations by analysts.

There has been no public inquiry yet to find out how the CPC is made to take on unhedged dollar borrowings though there has been speculation that it could be due to classic economic illiteracy and a prevalent Mercantilism.

Total credit to all borrowers in April including central bank credit fell to 144 billion rupees, from 426 billion rupees in March but was much higher than the 50 to 60 billion credit seen in periods of monetary stability. (Colombo/June15/2020)

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