Private credit continues to slump; October logs Rs.47bn contraction
„Cumulative contraction in 5 months through October tops Rs.200bn „CB expects private credit to continue its decline through end of the year „Officials under pressure to ease conditions to let credit flows to resume
Net credit to the private sector fell for the fifth consecutive month in October reflecting the depth and the breath of the economic contraction, which is impacting businesses and individuals alike after the economy crashed prompting the authorities to jack up rates to contain runaway inflation.
The Central Bank last week released data to show that in October the net credit to the private sector had contracted by Rs.46.8 billion bringing the contraction in total credit in the five months through October to over Rs.200 billion.
After October data, the total outstanding private sector credit in licensed commercial banking sector stood at Rs.7, 530.1 billion compared to Rs.6,981.4 billion at the end of December 2021 as the slump in the value of the rupee against the dollar in March gave a sudden boost to the rupee value of foreign currency loans before the private credit market fell flat.
As the economy crashed sending rates and inflation soaring, banks closed their lending spigots to contain the fallout on their asset quality as the conditions significantly weakened the profiles of borrowers prompting the sector to set aside billions of rupees for possible loan defaults in the last three quarters.
This was much visible in quarter ended on September 30, when banks reported a slump in their third quarter earnings, predominantly caused by record high provisions.
Though the Central Bank expects private credit to continue its decline through the end of the year, the recent comments by officials signalled that they liked to see some moderation in the decline in the months ahead before turning to a modest growth thereafter. The Central Bank remains under severe pressure to fast track the recovery process of the economy towards growth.
Weighing in on the matter, former
Central Bank Governor Dr. Indajith Coomaraswamy last week said prolonged shrinkage in the economy could not be sustained that long without giving rise to political and social consequences and thus signalled the authorities to shift gears to support and fast track growth.
However, now that the officials have chosen the International Monetary Fund (IMF) reform path to emerge out of the crisis, they face a tricky balance between staying on course the most toughest reform path ever subscribed to by Sri Lanka, which has taken a heavy toll on growth, and rebooting growth by stimulating the economic actors, who were pushed into hibernation.
Sri Lankan economy fell into deep crisis in 2022 as the two years of pandemic restrictions prevented the country from earning its crucial foreign exchange earnings from tourism, remittances, exports, foreign investments—both direct and portfolio investments—and borrowings.
This was then compounded by the largest boom in global commodities prices, global and local supply chain bottlenecks caused by the pandemic before been exacerbated by Russia’s war in Ukraine, which sent global energy, food and metal prices through the roof early this year.