Credit to government continues to surge despite private credit crashing

The government continued to borrow from the Central Bank and commercial banking system through August, although the financial sector regulator managed to crush private credit and the government managed to rein in state-owned enterprise (SoE) borrowings. This was achieved with the tight monetary and fiscal policies instituted since April this year. 

The government borrowed a net Rs.163.7 billion in August, up from Rs.129.5 billion in July, reflecting what a tough act it had to follow when turning around its budget, which went haywire during the two years of the pandemic.

However, the trend should reverse when the full fiscal reforms start kicking in, as the new revenue measures are still underway. The effort could take time to make meaningful change in the budget, which is being fixed through a full-scale revenue-based fiscal consolidation programme implemented under the watch of the International Monetary Fund. Sri Lanka recently gazetted the slew of tax reforms announced in May, some of which, including the income tax changes for the individuals and corporates, would come into effect from October onwards. 

These were on top of the already enforced changes to the tax policy, such as the twice hiked Value-Added Tax and telecommunication levy. 

The forthcoming budget for 2023 is expected to contain further revenue enhancing measures, including broadening the top corporate tax to include the exporters and those who enjoyed exemptions and concessions such as the information and communication technology sector. 

A capital gains tax could also be introduced in the November budget. 

Meanwhile, the SoEs were seen turning a net settler of loans to the banking sector in August, from being a borrower in July, perhaps due to the improvement seen in their cash flows after the government cut subsidies and raised prices of key energy and utilities to at least their full cost. 

The energy and power sector-related entities may have seen a turnaround in their cash flows after their bumper price revisions came in June and August, respectively, as the two sectors led the massive SoE losses. 

For instance, the total SoE borrowings turned into a net decrease of Rs.59.0 billion in August, after an increase of Rs.24.9 billion in July. 

The Central Bank, with its ultra tight monetary policy pursued since April onwards, managed to crush the private sector credit from May onwards, in a bid to rein in demand and thereby cooling the red-hot prices and racing imports.