Private credit soars in June


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Sri Lanka’s private sector credit has made a surprise recovery in June on the contrary to the widespread expectation that demand for private loans is easing in response to the back-to-back policy decisions to tighten credit conditions to arrest the excessive bank lending that creates imports and inflation. According to the latest data available, the banks in total have loaned a whopping Rs.80 billion in fresh credit to the private sector in June, an increase of 18.6 percent year-on-year (YoY), strongly picking up of from the Rs.18.9 billion granted in April and Rs.31 billion in May. 


During the first six months, the banking sector in total have loaned a staggering Rs.301 billion. 
When the money was made artificially cheaper during 2015 and 2016, the banks loaned Rs.692 billion and Rs.750 billion in private credit in the two years respectively.    


June’s data is a clear return of credit conditions to the levels previously seen when the country was nearing a balance of payment crisis when the cheap money was made available by the Central Bank through printed money to keep the interest rates artificially low.  


The June figures would have certainly baffled the Monetary Board when they sat last week to determine on the key policy rates for the economy. 


However, the Central Bank left the key policy rates steady as the inflation was easing but did not fail to express concerns over the slow pace of deceleration in private sector credit.  


The June private sector data, if persists through next couple of month, would force the Central Bank to resort to another round of policy tightening or impose some macro-prudential measures to curb credit flows in to certain sector deemed overheating.  


At a time when the Sri Lankan policy makers are forced to appease the International Monetary Fund (IMF) to keep their three-year programme on track, the Central Bank might also be forced to act to slowdown the growth in credit further as the IMF recently said another round of rate hike is “desirable” until clear signs emerge that inflation pressures and credit expansion have subsided.  


It now appears that although the inflation is subsiding, albeit some potential supply side pressures going forward, private credit remains at stubbornly high levels. 

However, higher private credit leads to higher money supply and demand-driven inflation unless corresponding increase in goods and services occur. 


In any case the prudent monetary policy management in recent months has led to steady accumulation of net foreign assets by the Central Bank and thereby not requiring the Central Bank to print money to keep the interest rates low. 


The printed money stock fell sharply to Rs.127 billion from about Rs.330 billion in early July and the money markets have also turned an excess liquidity of Rs.27 billion mainly due to direct purchase of dollars by the Central Bank to accumulate forex reserves. In any case, with banks operating with enormous amounts of excess liquidity, it is expected that the 2H17 would see a stronger growth in private credit unless the Central Bank imposes any macro-prudential measures curb the flow of credit. The Central Bank is already concerned about credit flows into the consumer segments as well as the luxury apartment segment. The former has led to higher household debt with unproductive lending and the latter shows some signs of overheating. 

 

 



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