Sri Lanka state and private credit grow at blistering pace in July

ECONOMYNEXT – Sri Lanka’s government borrowed 61.8 billion rupees from the banking system in July 2015, including 31.9 billion rupees of central bank credit (printed money) helping keep interest rates down and also boosting private credit, official data showed.

Private credit rose 40.9 billion rupees to 3,004 billion rupees in July rising 21 percent from a year earlier, picking up pace from 19.4 percent in June.

Credit to government rose 61.8 billion rupees to 1,735 billion rupees in July rising a blistering 23.8 percent from a year earlier.

Central Bank credit rose 31.9 billion rupees to 218.4 billion rupees rising a blistering 54.6 percent from a year earlier.

Central Bank credit injects fresh money into the banking system increasing the ability of all banks to extend credit over and above the real deposits raised and imports also go up when the newly created money is spent.

The Central Bank typically adds such demand by printing money to repay maturing Treasury bills, rejecting real bids, avoiding sovereign default and giving the printed money to the previous holders of the securities.

They will either spend or invest the new cash, generating excess credit and demand, generating additional imports to cool the demand or inflation or both.

Central Bank credit rose sharply in January, as the government appropriated forex reserves to repay a loan, but it failed to sell down the bills and kill sufficient domestic credit to recover the lost reserves.

Due to a peculiarities of quasi-fiscal activities of Sri Lanka’s central bank, where it acts as a banker to the state, when the monetary authorities monetizes large volumes of debt and keeps excess liquidity high, the state loses its ability to generate foreign exchange to repay foreign debt.

As a result when interest rates are kept artificially low and large volumes of money is printed the country rapidly descends into a balance of payments crisis.

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Meanwhile credit to state enterprises contracted by 6.8 billion rupees in July, helping cool down the monetary fires and generating real resources for the banking system. In June and May also SOEs were repaid debt on a net basis to the banking system.

Strong rainfall and falling oil prices helps state energy enterprises. Analysts say the state should not cut fuel or electricity prices until the balance of payment crisis is arrested even look at raising fuel prices in the short term.

One option would be to tax petrol and diesel equally, which will reduce cancer causing pollution. Petrol is also cheaper to import than diesel litre for litre, but diesel can generate more energy due to a higher carbon content. (Colombo/Oct12/2015)

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