Sri Lanka’s private credit steady in July, big liquidity swing

ECONOMYNEXT – Sri Lanka’s banks had loaned 46.5 billion rupees to private borrower in July down from 82.6 billion rupees a month earlier, while central bank credit to the government fell steeply indicative of dollar purchases, official data showed.

Private credit rose 14.7 percent from a year earlier to 5,202 billion rupees, slowing from a 14.94 percent growth in June.

Central Bank credit to government, fell by 50.7 billion rupees from 307.3 billion rupees in June to 356.6 billion rupees by end July.

At the beginning of July the central bank was injecting up to 48 billion rupees overnight at an average yield of 8.41 percent, keeping the market short overnight by over 35 billion rupees, to help end the currency panic started with excess liquidity in April.

As exporters sell dollars and unwind overdrafts, as currency panic reduces, liquidity builds up in the system. A similar effect is seen when the Treasury sells dollars or engages in a swap with the central bank.

By the end of July an overnight short of 35 billion rupees had swung into an unsterilized surplus of 39 billion rupees, which was not even mopped up overnight.

Under a ‘flexible exchange’ rate of not intervening even when there is excess liquidity (unsterilized defence), the rupee falls if the credibility of the peg breaks even if the liquidity is created from dollar purchases, if they are not used to defend when the peg moves to its ‘weaker side’.

Total credit to government fell to 2,226 billion rupees in July from 2,273 billion rupees a month earlier.

Borrowing by state enterprises rose by 17.1 billion rupees to 636.3 billion rupees.

Total credit from the banking system was only 17.4 billion rupees in July with the negative central bank credit issued against domestic assets. (Colombo/Sept25/2018)





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