COLOMBO (EconomyNext) – Sri Lanka’s credit to state from the banking system contracted in March 2015, with the Central Bank selling large volumes of its domestic assets to the banking system draining liquidity, while private credit rose, official data showed.
In the 12-months to March, net credit to government was up, 15.8 percent, down from 22.23 percent in February.
Private credit rose 41.40 billion rupees to 2,845.1 billion rupees in March 2015 from a year earlier, up 13.9 percent from a year earlier, speeding up from 12.6 percent in the 12-months to February.
Loans from foreign currency banking units to private business fell 22.1 billion rupees to 236.2 million US dollars from 258.3 million dollars a month earlier, while rupee credit rose by 63.50 billion rupees.
Credibility of Sri Lanka’s dollar peg had been undermined over the previous few months amid excessive state credit and liquidity releases by the Central Bank to the market.
In such situations, exporters may increase their rupee borrowings.
The Central Bank Friday re-imposed penalty interest rates which were first devised in 2001 as part of measures to combat balance of payments crises, which are triggered by liquidity releases and low interest rates, which will go into effect from June 01.
In March credit to the government contracted by 31.7 billion rupees, led by a sell down of Central Bank held Treasury bills to the banking system and the public.
A sell-down of Central Bank held Treasury bills (acquired either to trigger a balance of payments crisis or to sell forex reserves to settle state loans) will drain liquidity, permanently sterilizing them and prevent an equivalent amount of credit being loaned out, also safeguarding foreign reserves.
However in March, the central bank also released large volumes of temporarily sterilized liquidity to the interbank market.