Central Bank says relationship between credit and economic growth weakening
„Recent CB study reveals reason for low growth is not cost of finance „Urges govt. to put weight on reforms, trade policy to drive future growth „Warns monetary policy loosening could now play into BOP crisis „Rules out any monetary loosening due to po
The Central Bank has urged the government to put more weight on factor market reforms, improving investment climate and capitalising the country’s geographical location through trade policy in order to boost future economic growth, as the relationship between credit growth and economic expansion is on a weakening trend, while the loosening of monetary policy is not an option considering the current global environment as well as Sri Lanka’s deteriorating trade deficit.
Addressing the monetary policy review press conference last Friday, the Central Bank Governor, Dr. Indrajit Coomaraswamy asserted that with a deteriorating trade deficit and a current account deficit amid rising international rates, it is not prudent for Sri Lanka to relax its monetary policy for short-lived consumption-led economic boost.
“If we were to compress our interest rates, the difference between ourselves and the benchmark U.S. Treasury rates would lead to an acceleration of outflows from the rupee denominated treasury market where there is little of more than US $2 billion.
If you loosen the monetary policy when trade deficit is worsening or the current account is deteriorating, clearly you could play into a BOP crisis,” Dr. Coomaraswamy pointed out.
Moreover, he noted that a recent study carried out by the Central Bank’s Economic Research Department under the guidance of Senior Deputy Governor, Dr. P. Nandalal Weerasinghe, has found that the relationship between credit growth and economic expansion had been weakening.