CB settles for lower private credit growth as restrictions begin to bite economy

• Lowers this year’s private credit target to 12%, from previous 14%

The Central Bank appears to be settling for a lower private sector credit growth for the year than it earlier anticipated was possible, as the economy and its actors are beginning to feel the crunch from the ongoing extended restrictions on the economic activities, which in turn turning their sentiments dourer by the day. 

Up to last week the Central Bank was of the opinion that that licensed commercial banks could expand their stock of outstanding private sector credit by 14 percent by the end of this year, resulting in fresh disbursement of Rs.863.9 billion in private credit. 

In fact, the target growth looked within reach, as the economy was off to a robust start with the licensed banking sector disbursing as much as Rs.217 billion in fresh private credit in the first three months. 

However, with the restrictions going back in place to stem the third wave of COVID-19 from the third week of April, the Central Bank now doubts on the ability to achieve the envisaged credit growth and appear to be settling on 12 percent growth in private sector credit for this year. 

Even the ability of achieving that hinges on how long the restrictions will be in place.

“At the moment private sector credit is growing at 7.5 percent year-on-year,” said Central Bank Economic Research Department Director Dr. Chandrananth Amarasekara, referring to the March 2021 data and added, “by the end of this year we expect that to accelerate to about 12 percent, which would release Rs.750 billion additional rupees to the market as private sector credit”.

While credit growth of 12 percent is as twice as much what the economy saw in 2020 and the numbers so far clearly demonstrate a recovery in loan disbursements in line with the expectations of the Monetary Board, it also reflects the dim outlook for the economy in the rest of the year. 

Dr. Amarasekara said Sri Lanka couldn’t withstand another contraction in the style of last year’s second quarter in which the economy contracted 16.4 percent. 

“I don’t think the Sri Lankan economy could withstand a similar contraction any longer. We have to focus on that as well,” he said adding that both public health and economic standpoints matter in dealing with the virus.

Sri Lanka has extended COVID-19 lockdowns till June 7, on the advice of health authorities, who cautioned that a surge in COVID-19 cases could break the country’s health system.