Govt. borrowings up on liquidity injections and loans from banks

• Govt. borrows Rs.185.3bn on net basis in Dec., up from Rs.99bn in Nov.
• Total outstanding govt. credit from CB and banks as at end-2020 at Rs.4,548bn
• Govt. has made its intentions explicit to go about deficit financing through domestic credit

The borrowings by the government from the Central Bank as well as the licensed commercial banks rose again in December, after some slowdown seen in November, following the settling of a US $ 1 billion sovereign bond in October. 

According to the latest data available, the government has borrowed a total of Rs.185.3 billion in loans on a net basis during December, an increase from Rs.99 billion in November, raising the total outstanding net government credit from the Central Bank and licensed commercial banks to Rs.4,548.1 billion. 

The Central Bank provided Rs.69.4 billion worth of liquidity to the government by purchasing Treasury bills and bonds, which is typically referred to as printed money, while the licensed commercial banking sector in total gave Rs.115.9 billion worth of loans in December alone. 

With the December data, the licensed commercial banks have loaned Rs.1,246.3 billion in loans to the government while the Central Bank liquidity has risen from Rs.363.0 billion to Rs.868.9 billion from January through December 2020. 

This is typical when deficit financing is done through domestic credit, which is now coming at a historically low domestic borrowing cost. The Central Bank and government have expressed their intentions to tilt towards domestic borrowing to take advantage of the lower borrowing costs.

On the contrary to some apocalyptic views expressed by some over the amount of domestic state borrowings, a government of the size of Sri Lanka’s can withstand this amount of a domestic loan stock as long as its cost remains low and such money isn’t drained out to foreign countries via imports. 

Sri Lanka has extended its restrictions on imports of non-essential goods until its inflows recover and the oil bill remains modest. With the elevated amount of loans both to the government as well as to the private sector, the economy’s money supply further expanded in December 2020. 

The broad money supply measured through M2b, which consists of the Central Bank-issued currency stock and the moneys of the domestic and off-shore banking units of the licensed commercial banking sector, has expanded by a robust 23.4 percent in December, compared to 22.3 percent in November 2020. 

Meanwhile, the public corporations became a net settler of loans in December, perhaps due to their relative improvement in financial performance in 2020. 

The data showed that the outstanding credit to the public corporations by licensed commercial banks had decreased by Rs.8.4 billion in December, after such debt falling continuously from Rs.15.3 billion in October to Rs.7.5 billion 
in November.