February private credit growth accelerates

„Grows by 7.8% YOY and 6.9% from a month ago „In absolute terms, Feb. credit expands by Rs.82bn compared to Rs.25.7bn in Jan. „CB targets to expand private sector credit by 14% in 2021 „Higher credit disbursement indicates increased economic activity

Private sector credit growth, which reflects the speed of economic recovery, accelerated in February from a month with private individuals and businesses borrowing for consumption and investment.

According to Central Bank data, private sector credit grew by 7.8 percent in February 2021 over the same month in 2020, accelerating from 6.9 percent in January 2021 and 6.5 percent in December 2020.

The growth in private sector credit is typically presented in terms of its year-on-year (YOY) growth, and hence the comparison is made between the total outstanding private sector credit stock of licensed commercial banking sector in the two periods.

In absolute terms, the private sector credit expanded by around Rs.82 billion in February, more than thrice the growth of Rs.25.7 billion recorded in January.

With the February data, the licensed commercial banks in total were projected to have had an outstanding private sector debt stock of Rs.6, 278.7 billion, up from Rs.6, 196.6 billion in January.

Earlier this month, the Monetary Board of the Central Bank expressed dissatisfaction over the rate at which credit flows into the economy, and urged the banking sector to actively lend to the productive sectors of the economy to resuscitate domestic production.

The Central Bank targets to expand outstanding private sector credit by a robust 14 percent in 2021, which translates to an excess of Rs.850 billion in fresh credit.

The higher credit disbursement by way of private sector credit is a sign of increased economic activity as such money is spent on consumption, working capital and investment activities by individuals and businesses.

These activities to a larger extent were blunted during the five years through 2019 due to bad economic management and then by the pandemic, which harshly hit the economy in 2020.

Hence, the economy is operating with a significant slack, and is in need of continued support by way of monetary and fiscal stimulus to make up for that foregone output during the last six years.

However, there are some economists and analysts, who forewarn about impending inflation risks, as a result of continuous monetary stimulus extended by way of low interest rates and higher money supply.

Nevertheless, the medium term inflation projections continue to show that headline inflation is likely to remain in the mid single digits of 4 - 6 percent through 2021 - a benign level considered by the Central Bank.