Private sector credit slumps in April, but money supply picks up

• Bankers say lending activities were in near standstill in April
• Credit to govt. up by Rs.65bn;  credit to public corporations up Rs.66bn
• April generally has somewhat muted growth in new loans due to New Year holiday

Private sector credit from the banking sector slumped during April to just over Rs.13 billion from a massive Rs.120 billion surge recorded in March as most of the economic actors went in to hibernation during COVID lockdowns from mid-March.

But money supply in the economy measured by broad money expanded by 13.2 percent in the month, accelerating from 11.6 percent in March. 

Bankers said lending activities were in near standstill in April, except in the case of some trade related facilities, which were listed by the government as essential services. 

However, they saw a massive build up of deposits during the same period as people were unable to spend, except for essentials as they were forced to shelter-in-place while the corporates were conserving cash to build buffers to resume operations after lockdowns. 

Sri Lanka’s private sector credit gathered steam since January amid low interest rates while the tax cuts announced reignited business and consumer confidence until the virus forced the economy into shutdown.
On a year-on-year basis, however, private sector credit registered a growth of 7.6 percent, up from 6.5 percent in March as the year earlier period was also scuttled by the Easter Sunday attacks. 

A typical April has somewhat muted growth in new loans due to New Year holidays.

The Central Bank however does not expect private sector credit to expand more than 4 percent in 2020, significantly down from the earlier projection of 12 percent, which appeared possible at the start of the year before the pandemic hit the economy. 

Meanwhile, credit to the government in April from the banking sector rose by Rs.65 billion, while credit to public corporations rose by Rs.66 billion. 

The Central Bank recently said even at the current level of monetary expansion, which is measured by the broad money growth, there was remotely any indication of a possible overheating of the economy and assured the inflation was well anchored. 

The Central Bank maintains its target range of inflation for the year between 4 to 6 percent even at the current range of monetary expansion as the growth of the economy remains well below its potential, impairing possibility for any excess demand. 

The Central Bank forecasts 1.5 percent growth for the Sri Lankan economy in 2020, lower than its earlier projection of 4.5 percent.