Credit to private sector recovers in November from October lows

■ „Nov. credit expands by Rs.60.5bn, almost double the amount in Oct. ■ „CB meets yearend private sector credit target as such credit grew at its desired range despite pandemic

Credit to the private sector recovered in November from October lows indicating that the economy is on a recovery phase after the end of mobility restrictions, while the private sector is also beginning to spend to meet the strong demand coming through higher prices.

The latest data showed that licenced commercial banks have expanded their outstanding private sector credit by Rs.60.5 billion during November, almost double the amount in October when the pace of credit began to lose momentum in September.

The private sector credit which hit a high of Rs.134.1 billion in August, fell to Rs.29.1 before slightly recovering to Rs.35.1 billion in October raising questions if the rate hike by the Central Bank in August to end the pandemic era ultra-low interest rates would result in a slowdown in the demand for credit.

November credit translated into a 13.6 percent annual growth, higher than 13.3 percent through October and well within the desired range of between 12 to 14 percent projected for 2021.

With November credit, licenced commercial banks had extended a cumulative Rs.749.8 billion.

Private sector credit is an important barometer of the economic health, which tells the appetite for credit by businesses and individuals in an economy.

Some bankers and analysts argue that even with the August policy rate hike, Sri Lanka’s interest rates still remain low and at attractive levels and wouldn’t be a deterrent until at least a few more rate hike actions by the Central Bank.

However, views have been expressed lately whether the ultra-low rates had in fact delivered the intended outcomes as they had caused numerous excesses and anomalies in the economy with a potential to creating a huge concentration of wealth among a few.

Monetary policy hawks argue against continuously low interest rates, which have formed commodities bubbles globally and domestically. Ultra low interest rates have also been blamed for creating the current dollar liquidity crunch, which has brought the country closer to a potential external debt default.

Fitch Ratings in mid-december slashed Sri Lanka’s sovereign rating to ‘CC’ on these concerns.

Although the rupee liquidity is in huge deficit for months now, the Central Bank still provides liquidity to banks at its Standing Lending Facility Rate of 6.0 percent, and on December 31 such liquidity provided by the Central Bank to the banking sector was as high as Rs.467.3 billion while the overnight liquidity in the money market was in deficit of Rs.366.25 billion.

When banks give credit over and above their deposits, such money hit the Balance of Payments (BOP) through rising imports, for which the Central Bank will have to use its reserves to provide convertibility.

Hence, some economists have called to end the powers of the Central Bank to inject liquidity to markets, which has created commodities bubbles, inflation and caused repeated BOP troubles over the years.