Following the lifting of the 18 percent credit ceiling with the ending of 2012, the Central Bank recently gave a clear indication of its commitment to maintain the amount of the credit to the private sector at 18.5 percent during 2013.

“There will not be a fresh ceiling on credit, but we (CB) will keep a close watch on the situation to avoid an undue increase in credit expansion. Banks are now provided with the freedom to self-manage the situation and decide on their amount of credit,” stressed Central Bank Governor, Ajith Nivaard Cabraal urging the banking sector to be watchful of the situation, ensuring that credit remains at a healthy level without fuelling demand-driven inflation.

The credit granted by commercial banks to the private sector rose by Rs.24.1 billion in November 2012 to reach Rs.2, 348.5 billion in first eleven months with a 20 percent Year-On-Year growth. As at the end of 2011, the credit grew by a whopping 34.5 percent.

Indicating a further relaxation of monetary policy during the year, he said that it might be warranted if inflation eased, economic growth remained below potential, aggregate demand low and the monetary and credit expansion at lower rates than projected.

Commenting on the simultaneous easing and the tightening of monetary policy in a single year for the first time, he said, “These are usually four to five year cycles. Nevertheless we were able to move in, make the necessary adjustments and exit within just eleven months. However I can remember at the time, International Monetary Fund (IMF) was not happy over imposing a credit ceiling.”

Since 2001, Sri Lanka has completed two monetary tightening cycles from end of 2004 to January 2009 and February 2012 to November 2012. Further two relaxing cycles from January 2001 to end of 2004 and January 2009 to January 2012 were also completed.

The Central Bank brought in a multipronged policy package in early 2012 which included exchange rate flexibility, monetary tightening and fiscal tightening to solve the Balance Of Payment crisis and the falling external reserves due to foreign exchange sterilization for rupee strengtening.

(DK)