November credit to government up but Central Bank unwinds its debt

State borrowing from banks saw some modest increase in November last year from a decline recorded in the month earlier, but the money raised from the Central Bank has continued to be on a descent in a sign of gradual unwinding of treasury bills and bonds stock held by them on behalf of the government.
According to the weekly data released by the Central Bank on the money lent to the government by the banking sector showed Rs.30.0 billion in November in net credit, bringing the total outstanding credit to the government from the banking system to Rs.7,722.0 billion.

This is a reversal from the Rs.94.5 billion decline in net credit in October. However, the money lent by what is referred to as the monetary authority or the Central Bank has continued its decline through November, reflecting that the banks were responsible for the entire increase of November credit to the State. The breakdown shows that the credit extended by the banking sector barring the Central Bank was Rs. 66.2 billion but the credit from the Central Bank has come down by Rs.36.0 billion, adding to the Rs.71.3 billion decline in October.

With the November decline, the State’s outstanding to the Central Bank stood at Rs.2,317.0 billion, coming off Rs.1,052.0 billion in the last twelve months.
Meanwhile, the total outstanding credit to the government from the banking sector rose by Rs.1,483.0 billion in the twelve months to Rs. 5,405.0 billion.
This is because following the sharply raising interest rates in 2022, the Central Bank started raising large sums of money from the banking sector via treasury bills and bonds while practicing restraint on expanding their own balance sheet which could have added to the already high inflation.

In fact the amount of bills and bonds that can be purchased by the Central Bank directly is capped under the current IMF programme, and the new Central Bank Act prevents unrestrained Central Bank liquidity to the government.

Central Bank’s unwinding of net credit to the government should persist with the programme targets as the maximum amount is capped at Rs.2.8 trillion by the end of last year, said First Capital Research in a recent report which looked at the programme after the IMF’s first review which concluded recently.
“As the new Central Bank Act allows a longer transition period for monetary financing of 18 months, CBSL has committed to refrain from additional primary market purchases of government securities”, they said.

“Exceptions will be made to address external financing shortfalls within six months of the 1st review”, First Capital Research added.    
Besides, the Treasury is now maintaining a cash buffer to prevent the need for monetary financing of the budget, as disclosed by Central Bank Governor, Dr. Nandalal Weerasinghe.
However, going forward, even the money raised via bills and bonds from the market could also somewhat soften as the government’s fiscal situation has improved substantially in the fourth quarter due to higher revenue collection.

This would ease the crowding out effect, leaving more money to be lent to the private sector while further exerting downward pressure on rates.
In November, credit to the private sector from commercial banks jumped Rs.63.0 billion, extending the six-month-long streak of credit growth.