Private sector credit decline to persist through year-end, extending months-long decline

• SL’s private sector credit growth that turned negative in May appears to be continuing on that path until monetary tightening eases  

In another sign that the Central Bank remains resolute maintaining its current ultra-tight monetary policy through at least the end of this year, the monetary authority does not expect the private sector credit to recover anytime soon.
Credit to the private sector, an important barometer of the money supply and the dynamism of the economy, has been on a descent for the fourth consecutive month in August, potentially extending through the year-end, as the Central Bank has no intentions to take its feet off the monetary brakes, which it slammed so harshly in April, tipping the entire economy into a recession, as fighting inflation took precedence over economic growth. 

Sri Lanka officially entered into a deeper and a prolonged recession in the second quarter, when the economy contracted by 8.4 percent after a mild 1.6 percent decline in the first three months, as tight monetary conditions amid the foreign exchange crunch started biting into almost all economic activities since April onwards. 

The private sector credit growth, which turned negative in May and continued thereafter to record larger contractions, saw a Rs.59.0 billion slump in August, adding to the Rs.41.0 billion decline in July. 

The Central Bank doesn’t expect an end to this trend anytime soon and said the “current declining trend in the year-on-year growth of credit to the private sector is expected to continue during the remainder of the year”, with a corresponding decline in the growth in the broad money supply (M2b).  The announcement came as banks are preparing to file their third quarter financial report cards in the next few weeks, where they broadly expect to report a dismal performance in loan growth, provisions, non-performing loans and earnings, with a potential exception in margins, where there could be an expansion, as higher rates typically support bank margins. 

The degrowth in the broader private sector credit and each bank balance sheet also highlights a much larger problem faced by the businesses in general, as it tells that they have not assumed any fresh borrowings to expand their operations. 

Further, the earnings reports would also provide a sneak-peak view into how the households, squeezed by higher rates, had cut down drastically on spending amid soaring inflation and higher taxes.