Recent credit boom has failed to translate into productive private investment: JB Securities

The two-year credit boom during 2015 and 2016 has failed to bring in desired long-term development outcomes as most of such credit had gone into unproductive segments of the economy, a recent research report by a leading Colombo-based equities brokerage, opined. 

During 2015 and 2016, Sri Lanka’s money printing Central Bank created a burst in private sector credit, sending inflation through the roof and triggering a run on the rupee until the International Monetary Fund (IMF) bailed out the country from a balance of payment crisis. 

The situation turned worse when the newly elected rulers announced a thumping salary hike to the public sector, hoping to consolidate their position in the upcoming elections. 

As a result, people flocked to banks to borrow for everything from vehicles to houses as the loans were cheap and they had enough money to service them with increased salaries.

 “The latest credit boom has failed to translate into productive private investment. Credit appears to be concentrated in unproductive sectors – real estate, household consumption and wholesale and retail trade,” JB Securities said. 

The brokerage, which has its own research unit, recently took stock of the economy in their latest report titled ‘Macro Economic and Equity Review and Outlook – 3Q 2018’. 

Sri Lanka went through a similar credit boom in 2011. The then government relaxed the policies to give the peace dividend to people after the conclusion of the 30-year old civil war in 2009, only to tighten them later causing difficulties to the people.

In 2015 and 2016, the bulk of the private credit growth had been driven by construction and personal loans followed by services, wholesale and retail trade. 
The agriculture and fishing and industry and other sectors had shown very poor appetite for credit, JB Securities’ data showed. 

Mirror Business this May showed that 20 percent of the total outstanding loans were in consumption category while manufacturing and agriculture, including fishing and forestry, had absorbed only 11 percent and 8.4 percent of the total loans. 

Loans to the consumption sector is closely followed by the loans to construction and wholesale and retail sectors as the latter two sectors had absorbed 16 percent and 15 percent of the total loans outstanding. 

After the policies were tightened from mid 2016, the economy has been seeing some deceleration in domestic credit growth from about 24 percent to 10.1 percent by end of July 2018. 

However, the private sector credit growth is still growing at double digits since early 2015, JB Securities said. On a year-on-year basis, the growth in private credit decelerated to 14.3 percent in August from 14.7 percent in July.