ECONOMYNEXT – Sri Lanka’s private credit contracted by 57.6 billion rupees in February 2023 from a month earlier, while credit to state enterprises also fell by 35.4 billion rupees, official data show.
Private credit is down by 494 billion rupees since May 2022. Sri Lanka’s private credit growth fell to 3.0 percent in the year to February 2023 down from 12.4 percent last year, according to central bank data.
Private credit has been negative, from June 2022 and has helped stabilize the balance of payments and external sector.
Domestic investment (and consumption) has to be reduced to save part of the inflows to re-build foreign reserves or repay foreign debt including private credit lines. Bank have also steadily reduced their foreign exposures over the past year.
Net foreign assets of commercial banks were positive by 61.5 billion rupees in February, up from a negative 540 billion rupees last year in a steep correction.
In 2021 and the first few months of 2022, private credit was largely driven by money printed (liquidity injections made) to mis-target rates triggering forex shortages and pressuring the rupee.
Under flexible inflation targeting the central bank can freely print money until inflation rises to around 5 percent, but forex shortages emerge much earlier as the newly injected liquidity is used to drive credit.
When reserves are sold to stop the currency from falling, money is re-injected to offset the liquidity shortage in the banking system by either purchasing Treasuries outright or through short term injections.
Identical trends are seen Pakistan and other countries which defaulted recently amid collapsing currencies.
After rates are hiked and the currency crisis is halted part of the loans given with injected credit (mal-investments) go bad according to classical economic theory pushing up non-performing loans.
In Sri Lanka all this is later blamed on deficit spending as the results of soft-pegged monetary operations are classified as net credit to government (claims on the government and not claims on commercial banks).
In February net credit to government from the central bank fell by 254 billion rupees, for reasons that are not immediately clear.
The central bank bought dollars in February, which tends to offset short term injections. It is not clear whether there was a profit transfer in February.
In Sri Lanka, unlike in countries like Singapore – where there is greater knowledge about note-issue banking and no forex shortages and IMF programs – monetary profits including from domestic operations profits are transferred as liquidity altering reserve money and reserve balances of banks. (Colombo/Apr10/2023)
