Sri Lanka SOE credit up in October, private credit moderate

ECONOMYNEXT – Sri Lanka’s private credit grew 26.5 billion rupees in October 2019 down from 53.7 billion rupees a month earlier and credit to state enterprises surged 33.5 billion rupees, the highest since 50 billion rupees was loaned in December 2018.

Central bank credit to government declined by 23.5 billion rupees to 349.5 billion rupees, while net foreign assets of the central bank grew 17.6 billion rupees to 869.3 billion rupees.

In the month of October the central bank bought 35 million US dollars from forex markets, with no upwardly disorderly adjustment but it also sold 17 million dollars.

Sri Lanka ended prudent monetary policy around July 2019, and started injecting liquidity amid a credit spike to target a call money rate.

The central bank also started buying bonds, abolishing a prudential rule established during the tenure of Governor A S Jayewardene, giving itself leeway to engage in ‘operation twists’ and distort rates deeper into the yield curve, analysts who study policy errors of the monetary authority have said.

The breaking of the prudential rule will also allow banks and speculators to dump long bonds on the central bank, critics say.

Sri Lanka’s central bank has busted the rupee from 4.70 to 182 to the US dollar, since its creation in 1951, through a variety of policy errors.

It is the worst performance among South Asian and Gulf monetary authorities, which all began at the same level (pegged or ‘dollarized’ with Indian rupees/Sterling) at independence.

Loans to central government , fell 2.9 billion rupees in October, helped by the contraction in central bank credit.

Credit to government from commercial banks have expanded 18.7 percent in the past 12-months, as tax revenues fell after a collapse of a highly unstable soft-pegged exchange regime called ‘flexible exchange rate’ operated with unrestrained liquidity injections and a delayed interventions.

Until the policy reversal around July there were no central bank re-financing of such borrowings.

Private credit on the other had grew 5.1 percent in the past 12-months, as credit slowed after the ‘flexible exchange’ rate collapse. (Colombo/Dec02/2019)