CB forecasts still robust private sector credit growth of 10% for 2022

• Unlikely for economic growth to return till 2024 as lagged effect of tight policies to subdue growth in 2023 

Coming off of the highest ever growth recorded in private sector credit in 2021, the Central Bank has forecasted a somewhat tapered down, yet still robust growth in private sector credit in 2022, as the country enters a period of intense volatility amid the highest ever interest rates and inflation. 

Sri Lanka’s private sector credit by the licensed commercial banks rose by 13.1 percent or Rs.810.5 billion in 2021, the most for any year, as the banks kept open their lending spigots, making the most of the lowest rates in town, although the virus-related lockdowns buffeted the full potential. 

The 2022 growth, if materialised, would unleash Rs.700 billion in fresh credit to the private sector, qualifying the growth to become still robust, although somewhat eased from 2021. 
By the end of 2021, the licensed commercial banks had a total outstanding private sector credit of Rs.6,981.4 billion and in the first two months of the year, Rs.69.6 billion of net private sector credit was extended, logging a 12.3 percent growth. 

 “...in the short run, a notable rise in the interest rates would discourage lending and in turn hamper economic growth,” the Central Bank said in its annual report released last week. 

The Central Bank raised its key policy rates by a total of 850 basis points so far this year, including the most aggressive 700-basis-point hike delivered on April 8 to tamp down inflation and reduce pressure on the foreign exchange. 

“The tightened monetary policy would be instrumental in stabilising the external value of the domestic currency favourably, facilitating the influx of foreign exchange,” the annual report said. 
Meanwhile, along with the growth in private sector credit, the money supply measured by way of broad money or M2b also is expected to cool down to 12.7 percent in 2022, from 13.2 percent in 2021. 

During 2020, broad money grew by an excessive 23.4 percent, due to a low base as well as the higher amount of liquidity poured into the markets by the Central Bank to both backstop private sector borrowers as well as to ensure the people have money after the virus-related lockdowns lost them their livelihoods. 

However, the overdid quantitative easing style stimulus stoked inflation and triggered balance of payment issues and other anomalies in the economy from the start of the second half of 2021, compounding the issues into a much larger economic calamity, which is unravelling now. 

“While the expansion of credit to the private sector as well as broad money supply are expected to remain somewhat subdued in 2023, due to the lagged effects of tight monetary policy, growth of broad money and private sector credit is expected to normalise and improve from 2024 onwards over to the medium term amidst a moderation in the expansion of NCG, as the envisaged fiscal consolidation efforts would materialise,” the annual report said.