Private sector credit rebounds in August

• Up by Rs.78.3bn or 5.2% bucking the 3-month contraction
• Money in circulation up as supply expands by 17.5% 
• Net credit to govt. down to Rs.47.2bn from Rs.170bn in July 
• Net credit to public corporations up Rs.40.3bn from Rs.31.3bn in July 

Private sector credit made a strong rebound in August as banks ramped up disbursements of credit to private borrowers, from large to small businesses and individuals as economy gathered pace after the coronavirus put a dampener on credit growth during the first half of the year. 

According to latest Central Bank data, the total outstanding credit to the private sector gained by a strong Rs.78.3 billion or 5.2 percent in August, reflecting that the gross disbursements of new credit had surpassed settlements of loans for the first time since April.

Sri Lanka’s credit to the private sector was off to a fine start during the first three months of the year supported by new found economic optimism from change of government and the business and consumer-friendly economic policies that followed by way of tax cuts and reduction in interest rates. 

Private credit grew by year-on-year (YoY) pace of 4.3 percent and 4.6 percent in January and February or by Rs.25.3 billion in absolute terms, accelerating to 6.4 percent or Rs.120.1 billion in March before the coronavirus induced lockdowns brought the economy in to a pause.  

The lockdowns crimped the pace of growth to a nominal Rs.13 billion in April and suffered de-growth in the following three months from May through July, although the gap narrowed every month.

In May, the total outstanding private sector credit declined by Rs.70 billion, decelerating to Rs.54 billion and Rs.3.6 billion in July, reflecting the gross disbursement of credit had gathered pace since lockdowns were eased from May. 

This reflected from the gross loan disbursements, which reached to pre-pandemic levels in July, reflecting the changing gears of the economy from a “recovery phase to an expansion phase,” the  Central Bank said.  

The Central Bank in May revised down its full-year private sector credit growth projection to 4.0 percent from 12 percent, which appeared possible at the start of the year before the coronavirus crisis emerged. 

The rebound in private sector credit in August reflects that both businesses and individuals are accelerating their economic activities to make up for the lost opportunities during lockdowns, which could power decent growth in second half. 

While the Central Bank appears to be content with the economy avoiding a contraction in 2020, the government maintains a more optimistic forecast of 1 
percent expansion.

Meanwhile, net borrowings by the government increased by Rs.47.2 billion in August, decelerating from Rs.170 billion loaned to the government by the banking 
system in July. 

Data from March through June showed banks’ holdings of government securities had increased by a massive Rs.253.3 billion, the most in a year when the private sector credit slowed.  During the first six months, the government’s total outstanding debt stock rose by a trillion rupees as the government ramped up borrowings to provide assistance to the people affected by the pandemic, sustain government functions and to control the spread of the virus. 

Meanwhile, the net loans by the banking system to public corporations increased Rs.40.3 billion in August, accelerating from Rs.31.3 billion in July.  Credit extended to the private sector, public corporations and government helped to increase the money in circulation in the economy further as the money supply measured by M2b expanded by 17.5 percent in August on YoY basis, accelerating from 15.7 percent in July.