ECONOMYNEXT – Sri Lanka’s private credit fell 52.2 billion rupees in January 2024, after climbing 97.5 billion rupees in December and 62.9 billion in November, while central bank credit was overall deflationary, supporting monetary stability and reserves, official data shows.
Sri Lanka’s private credit spiked in December amid anecdotal evidence that import containers also surged ahead of a value added tax hike.
If the credit surge was linked to consumption imports, the loans will be liquidated as goods are sold.
Before the ‘age of inflation’ and chronic balance of payments deficits (aggressive outright purchases through open market operations to maintain a bureaucratically decided policy rate), some classical economists (including Adam Smith, in line with the the so-called ‘real bills doctrine’) supported limited note issue banking on a similar principle, analysts say.
Before the 1860s, Bank of England customers were bill brokers and discount houses, not banks which gave investment credit.
Central bank credit was down 91 billion rupees in January 2024 after growing 58.8 billion rupees in December, helping keep the external sector stable. An absolute reduction in central bank credit leads to a balance of payments surplus.
In Sri Lanka, the central bank passively support credit with standing facilities without a penalty rate and a narrowly targeted policy rate, in a deeply flawed operational framework that drives the country into external crises as soon as private credit recovers, analysts say.
Before 1971 (or 1978 for Sri Lanka) any such activity was subject to either an external or specie anchor, which was the final backstop.
But external instability and panic from short term credit spikes, backed by standing facilities, is supported by ‘exchange rate as the first line of defence’, policy (a type of sudden regime shift) now advocated by the International Monetary Fund in unstable countries that continue to be unstable, critics say.
SOE credit was also down 22.8 billion rupees in January 2024.
The Ceylon Electricity Board was also profitable and has settled some of its debt. Whether settling IPPs also led to setting bank debt is not known.
The CEB however cut tariffs in March.
Net credit to government from the banking system was 50 billion rupees (after central bank credit contraction) though commercial bank credit was 141 billion rupees. (Colombo/Mar18/2024)