Private credit expands in Jan. albeit slower compared to Dec.

• Jan. private credit expands by 6.9% to Rs.25.7bn
• Dec. 2020 private credit at Rs.76.7bn
• CB expects 14% private credit growth this year

Bank credit to the private sector expanded in January, continuing the growth momentum set forth in August, last year, indicating the potential for higher economic growth at the dawn of the new year, after a pandemic-hit 2020. According to the latest Central Bank data, the licensed commercial banks expanded their outstanding private sector credit by 6.9 percent in January, up from 6.5 percent in December and 4.5 percent recorded in January 2020.

The January expansion of private sector credit translated into Rs.25.7 billion in fresh loans to the private borrowers for consumption, working capital and investments. However, this is a deceleration from the Rs.76.7 billion fresh credit granted by licensed commercial banks during December 2020. January is typically a relatively slow month, as banks in December attempt to book as many loans as possible before the year-end, for both to show achievement of individual and departmental targets as well as to show higher growth in their overall balance sheets at the year-end. 

With January credit, the licensed commercial banks now have Rs.6,196.6 billion in total outstanding private sector credit, compared to Rs.6,170.9 billion at 
end-December 2020.  

The Central Bank projects 14 percent growth in private sector credit in 2021, which amounts to Rs.864 billion in fresh credit. 

Thereafter, the Central Bank expects the private sector credit to expand by 12 percent every year, in the medium term. 

But one caveat remains hanging and that is inflation, as the Monetary Policy hawks are of the belief that the inflation could return with the growth in the private sector credit, as such credit puts pressure on currency via higher imports. 

However, Sri Lanka aims to continue with the lid on non-essential imports at least this year and the mid-term projections show no higher inflation than the 4 to 6 percent range.Sri Lanka can and should afford higher imports with fully liberal international market place, as called by free market ideologues, if a large amount of private sector credit is channelled into export income-generating industries, so that the country can smoothen the current asymmetry in the merchandise 
trade account. 

According to the government and Central Bank, that is the economic policy currently being pursued.