Private credit still running high; Policy brakes ineffective?

The policies adopted by Sri Lanka’s Central Bank appear to have failed in curtailing the growth in monetary expansion, as private credit has resumed its growth at an alarming rate. According to a monthly private credit growth tracker by Gradient Alliance – a Colombo based management consultancy, the private credit in the economy in March grew by a significant Rs. 86.4 billion, climbing from Rs.53.7 billion in February and Rs .43.7 bi l l ion in January.

This is well above the Rs.58 billion average monthly private credit seen in 2015. O n a y e a r- o n – y e a r (yoy) basis, private credit grew by 27.7 percent, accelerating from 26.5 percent a month ago. The highest authority, which decides monthly on the direction of the monetary policy of the economy– the Monetary Board– however was silent on the absolute growth in private credit in its recent monetary policy statement, as it disclosed only the yoy growth, which was also higher than a month before. This appears to be a clear diversion from the regular practice of the Monetary Board, which discloses the monthly growth in private credit both in terms of absolute and relative terms

“Private credit growth is a Central Banker’s nightmare”, the Central Bank Governor Arjuna Mahendran told a forum few days ahead of the monetary policy decision on Friday. Private credit has spillover effects into inflation. March private credit data was much awaited by both the Monetary Board as well as the market participants as it was supposed to reflect the impact of a 1.5 percent hike in banks’ statutory reserve ratio in January, followed by the 50 basis point hike in key policy rates in February.

Sri Lanka’s private credit reached an all-time monthly high of Rs.158 billion in October 2015 as the floating of the rupee in September was not complemented by a similar upward adjustment in interest rates, ultimately busting the rupee by 9 percent in 2015. Sri Lanka’s private credit grew by 25 percent or Rs.691 billion in 2015 – the highest in history.

The Central Bank does not want to see more than 15 percent growth in private credit in 2016. Governor Mahendran on an earlier occasion said, further tightening of monetary policy depends on the direction of the private credit and core-inflation. With the inability to tame the growth in private credit and both demand and supply side pressure mounting on inflation, analysts weigh on another round of rate hike shortly unless the credit slows down in the subsequent months.