CB eyes 14% private credit growth; hints at remaining dovish throughout 2021

• CB Governor pledges to visit open market economic policy adopted in 1977
• Says for a sustainable low interest rate structure, foreign exchange leakages by way of non-essential imports should be stopped 

The Central Bank wants the banking sector credit to the private sector to grow by a robust 14 percent this year, reinforcing its lending bias to power the economy, while hinting that the Monetary Board is likely to remain dovish throughout the year. 

Unveiling the Road Map 2021, containing the monetary and financial sector policies for 2021 and beyond, Central Bank Governor Prof. W.D. Lakshman stressed upon the policy stance premised on rebuilding a dynamic domestic industrial base to overcome the economic malaises ailing the Sri Lankan economy.

He also vowed to revisit the open market economic policy espoused since 1977, which dismantled the barriers that were in place to safeguard and support the domestic industries.  

“Low lending rates and adequate levels of liquidity in the market would help channel funds to the private sector in the form of low-cost loans,” Prof. Lakshman said. 

“The Central Bank expects credit to the private sector to expand by around 14.0 percent in 2021 and at least by around 12.0-12.5 percent annually over the medium term, thereby supporting the envisaged growth of the economy,” he added. 

In the first 11 months of 2020, Sri Lanka’s private sector credit grew by a robust Rs.300 billion, surpassing the private sector credit extended by the licensed commercial banks in the whole of 2019. 

Commercial banks gave Rs.41.4 billion in fresh credit to the private sector in November, logging a robust 6.2 percent growth over the same month in 2019. 

A few weeks ago, Fitch Ratings also projected an acceleration in the private sector credit in 2021, which could diffuse the stresses on the banking sector and speed up the overall economic growth.

The difference between the current low interest rate environment and similar earlier cycles—the latest was in 2015— is that the current one has placed adequate obstacles over foreign exchange leakages by imposing restrictions on non-essential imports. 

“For the sustainability of the low interest rate structure, it is essential that foreign exchange leakages for non-essential imports and outward investment are minimised, thereby allowing the domestic production economy to reap the intended benefits from easy monetary conditions,” Prof. Lakshman said.  

“Monetary policy will also be reoriented towards supporting the identified sectors of the economy and lending targets to priority sectors and winning industries will be introduced during the year, following consultation with the relevant stakeholders,” he added.