---

urther easing of the monetary policy may not solve the problem of extremely low private credit growth, which fell to more than a four-and-a-half-year low of 2.2 percent in May 2014, compared with 3.3 percent a month earlier, according to Standard Chartered Bank (StanChart).

“…a further rate cut may not solve the problem of low credit growth,” the bank said, as it observes an impairment in the monetary policy transmission.
Since December 2012, the Central Bank has been on an easing mode and cut its key policy rates – the repurchase rate and reverse repurchase rate by 125 basis points and 175 basis points to multi-year lows of 6.5 percent and 8.0 percent, respectively.

The message from StanChart will come as a food for thought for the Central Bank, which might consider another rate cut sooner or later, as the private credit growth failed to pick up to its desired level of 16 percent— which now appears unattainable from where it is now.

The message from StanChart will come as a food for thought for the Central Bank, which might consider another rate cut sooner or later

However, StanChart in its ‘Economic Alert’ discouraged further rate cuts by the Central Bank on the premise of strong gross domestic product (GDP) growth of 7 percent, expected commencement of the US rate-hiking cycle in H1-2015 and impairment in monetary policy transmission as highlighted above.  

In recent times however, the Central Bank has imposed targeted measures to drive the credit growth such as reduction of statutory reserve ratio, cut in penal interest rates and lately the credit guarantee scheme for pawning as pawning is identified an integral part of the private credit growth in Sri Lanka.

Sri Lanka is well known for using demand management strategies such as shifting interest rates and foreign exchange rates to increase credit growth and thereby to grow the economy rather than resorting to tougher structural changes such as export growth, tax reforms, state-owned enterprise reforms, etc.

Soon after the end of the war, in a bid to deliver the peace dividends, the country’s economic policymakers took short cuts such as reducing interest rates and allowing the rupee to appreciate, forgetting some of the fundamental laws of economics, which ultimately cost the entire country dearly.

The same policymakers had to take tough and painful reforms in February and March 2012 to address the dwindling of reserves, which were used in defending the rupee. In addition, the currency peg was abandoned, energy prices were hiked and excise duties were increased to curb the imports.

The Central Bank also imposed a ceiling on credit for banks in addition to jacking up policy rates, which is considered a very unusual monetary intervention by a central bank.