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Sri Lanka private credit up, SOEs borrow more in Feb 2021

ECONOMYNEXT – Sri Lanka’s credit to private business rose to 79.4 billion rupees in February 2021, the highest since September 2020, when a Coronavirus second wave started, while state enterprises also borrowed more and money printing continued, official data showed.

In January private credit fell to 25.2 billion rupees, a usual trend in Sri Lanka where December credit numbers go up followed by sometimes negative credit in the first month of the following year.

Sri Lanka’s economic activity and private credit has been recovering since a Coronavirus lockdown slowed consumption and led to a credit contraction in the second quarter of 2020, reducing imports and allowing the central bank to buy dollars.

State enterprises also borrowed 21.9 billion rupees in February, on top of 55.9 billion rupees in January, central bank data showed.

SOE borrowing in US dollars also grew from 446.9 billion rupees to 460.4 billion rupees a usual practice in Sri Lanka that worsens a current account deficit, accelerates currency crises, and expands losses at state energy enterprises, analysts say.

Sri Lanka’s habit of fixing energy prices has been a trigger of currency crises in the past. In 2018 the Ceylon Petroleum Corporation was hit by an 80 billion rupee loss as dollar borrowings effectively sabotaged the correction expected from a price formula, critics have said.

With the recovery in private credit, the rupee has come under renewed pressure as printed money is loaned out to the broader economy.

In February 2021, 72.2 billion rupees of money was printed up from 55.4 billion rupees in January.

In the first two months of 2021, 127.6 billion rupees has been printed, based on central bank data.

In February borrowings by the central government eased to 35.1 billion rupees from 209.9 billion rupees a month earlier.

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In February income tax collections picked up to pre-Coronavirus levels, the Finance Ministry has said.

Sri Lanka’s government credit had dominated bank credit from December 2019, when taxes were cut in a fiscal stimulus, adding to monetary stimulus that began around August 2019.

Monetary stimulus was ratcheted up in the first quarter under Modern Monetary Theory leading to an unprecedented assault on the balance of payments. Sri Lanka recorded a 2.3 billion dollar BOP deficit in 2020, the highest in history. (Colombo/Apr04/2021)

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