Private credit continues to shrink as economy looks for breather

• Private sector credit contracts at Rs.96bn in Jan, up from Rs.73bn in Dec.
• Private sector credit has been on the decline since May last year
• However, on an annual basis, private sector credit showed 4.3% growth

Sri Lanka’s higher interest rates continued to yank credit to the private sector from banks as such credit recorded a sharper pull back to start the year in January. 

According to Central Bank data, commercial banks saw their cumulative credit to the private sector plunging Rs.96.1 billion in January, from the Rs.72.6 billion de-growth recorded in December 2022. 

Credit to the private sector has been declining continuously from May last year when the bumper policy rate hike in April and the economic meltdown started sending shockwaves through balance sheets of both businesses and households alike, which pulled back on their spending due to sharp acceleration in inflation. 

On an annual basis, however the private sector credit showed 4.3 percent growth from the levels seen a year ago. 
The January private sector credit number reflects the still unraveling economy, which is struggling to find a footing. 
However, since the middle of February Sri Lanka has been seeing positive signs with some increase in foreign currency inflows on the back of strengthening remittance, tourism industry and other funding lines which improved sentiments.

As a result, the spot rupee appreciated by about 11 percent by last week from two weeks ago. The year-end forecasts where the rupee would end up were all over the place last week as Fitch on Wednesday predicted the rupee to plunge to Rs.390 to a dollar while Bloomberg Economics put the rupee at Rs.309 a day later. 
Monthly movements in private credit are important high frequency economic data points which provide an idea about the health of the economy. 

The sharper fall in credit in January reflects that the economy is still in the decline. 
The Central Bank surprised the markets a fortnight ago when it delivered a 100 basis point hike in key policy rates when the markets were expecting a dovish stance.