Credit to state zooms; private credit falls

LBO- Credit to business from Sri Lanka's commercial banks fell to 44.5 billion rupees in January 2012 from 60.2 billion rupees a month earlier, but credit to the state zoomed to a new monthly peak 73.7 billion rupees, official data showed.

Total credit to government from the banking system increased 53.3 percent to 926.8 billion rupees by end January 2012 from 833.6 billion rupees a month earlier, central bank data showed.

In January credit to state enterprises rose 3.2 billion rupees to 201.7 billion rupees. Borrowings by state enterprises rose from 120.7 billion in April to 198.5 billion in November 2012.

From mid 2011, state-run Ceylon Electricity Board, a power utility increased thermal generation with subsidized furnace oil from Ceylon Petroleum Corporation, with rains failing.

The finance ministry said in January, CPC a key source of taxes had not been able to pay up. Petrol in particular is taxed at 25 rupees a litre and is sold at high profit margin. Diesel is only taxed at 2.50 rupees a litre.

"The Petroleum Corporation (CPC) was unable to pay the General Treasury even the direct tax income it earned in last January through selling petrol and diesel," a finance ministry statement posted on its website said two weeks ago.

"Even the Treasury had to face problems as a result of not receiving this tax income. It affected many other institutions as well."

Other reports said the CPC was also owed billions of rupees by state-run Srilankan Airlines.

Rising state borrowings from the banking system, particularly central bank credit (printed money) put pressure on Sri Lanka's currency peg with the US dollar.

January's 73.7 billion rupee increase in loans to the state included 25 billion rupees of central bank credit (printed money) to government.

In addition to money injected to sterilize interventions, the Central Bank also gives a socalled 'provisional advance' in January and sometimes makes profit transfers.

Analysts have warned that such liquidity transfers in times of credit demand, results in immediate fresh pressure on the country's currency peg and foreign reserve losses of equal amount when the peg is defended.

The rupee has fallen from around 109 rupees from mid 2011, to around 121 against the US dollars in March.

In February, Sri Lanka raised both power and petroleum prices in a bid to reduce credit growth. The central bank asked banks to almost halve credit growth to 18 percent a year in 2012 compared to a year earlier.

In the 12-months to January private sector rose 34.3 percent to 2,050.4 billion rupees.

Private sector credit increased from 25 to 40 billion rupees a month in the first half of the year to over 60 billion rupees in some months in the second half after the Central Bank began to inject liquidity to sterilize foreign exchange interventions.

Sri Lanka has a Bretton Woods-style dollar 'soft-peg' which is subject to frequent balance of payments crises. In the current crises more than a quarter of the country's peak foreign reserve of slightly over 8 billion dollars had been lost.