Rupee collapse continues to manipulate true private credit data 

The sharp collapse of the rupee following the botched currency float, which sent shockwaves and pushed the economy towards hyperinflation, continues to manipulate key data relating to important sections of the economy. 
One area is the private sector credit numbers where the sharp rupee depreciation impact made it impossible to discern the true conditions in the private credit markets. 

The Central Bank last week announced the private credit data for April, which showed an increase of Rs.219.3 billion, but said the March rupee depreciation impact continues to swell up the true nature of the situation.

 
In March, private credit soared by an exponential Rs.478 billion, most of which came from the rupee depreciation impact as the loans in foreign currency got revalued at the weaker rupee. 

“The sharp depreciation of the Sri Lankan rupee since March 2022 remains the key reason for the augmentation of monetary and credit aggregates in rupee terms in March 2022 and April 2022,” the Central Bank warned the data users.

Since the allegedly unilateral decision by the then Central Bank Governor Ajith Nivard Cabraal to float the currency on March 7, the rupee shed 80 percent of its value, sending prices through the roof and making the lives of the people miserable. 

Despite the numbers which were swollen by the rupee depreciation impact, banks hardly gave any loans in April as they increasingly grew jittery even months before the crisis unravelled as they were getting ready for an economic hard-landing and a sovereign default forewarned by their rating agencies. 

They made massive scale provisions against potential loan and other financial asset losses in their books for the March quarter, which weighed heavily on their earnings. 

They also tightened their credit conditions from the beginning of the year and turned cautious when approving facilities before effectively bringing the curtain down on lending. 

Instead, they raise money via deposits and lend to the government through treasury bills, earning a fine margin. 
Meanwhile, net credit to the government from the banking system increased by Rs.4.6 billion in April while the outstanding credit to public corporations rose by Rs.177.2 billion in the month which includes the rupee depreciation impact. 

Although the money supply measured by broad money or M2b showed a sharp expansion of 20 percent in April, much of the impact came from the rupee depreciation as the money supply continued to narrow after the demand destruction policies instituted by the Central Bank earlier in the month.