Sri Lanka’s private credit slumped in the month of April to the great relief of the country’s Central Bank, as the rate hikes by the monetary authority in the past 16 months appeared to have yielded results.
The latest data available on credit granted to the private sector showed that Sri Lanka’s banks had disbursed a total of only Rs.18.9 billion, just under a quarter of the credit they granted in the preceding month.
This is a steeper decline from the Rs.82 billion loaned by the banks to the private sector in March.
The data showed that the Central Bank tools were only capable of taming the monetary aggregates of the economy, which took a long 16-month wait, which the Central Bank termed as the ‘monetary policy transmission lag’. Sri Lanka’s monetary policy actions take between 12 to 18 months in general before the effects of such actions being fully reflected in the real economic indicators.
Sri Lanka began the tightening cycle in January 2016 after the increase in the banks’ statutory reserves ratio by 150 basis points followed by three hikes in key policy rates, each time by 50 basis points, to arrest the higher growth in private sector credit and the rising inflation, which caused most of the economic imbalances. The Central Bank Governor, Dr. Indrajith Coomaraswamy confided that the trend seen in April was expected to continue towards the remainder of the year and thus the total private sector credit would ease off towards the level desired by the Central Bank.
“A further deceleration in the growth of credit to the private sector is anticipated, given the prevailing high nominal and real lending rates in the market,” the Central Bank said.
The bank expects no more than a 15 percent growth in private sector credit for 2017. However, the year-on-year growth in private sector credit is still around 20 percent.
The money supply in the economy measured by the broad money or M2b has increased by a little over 20 percent, considerably higher than what the Central Bank wants.
Meanwhile, independent economists opine that April is traditionally a month with lacklustre demand for credit and hence the current data might not provide a 100 percent true picture of what is to come.
But the Central Bank has vowed to crush the demand for consumption credit as it abandoned the interest rate caps on personal lending products such as credit cards, housing loans and temporary overdrafts.
The banking sector analysts forecast a tepid second quarter earnings season for banks as most banks may fail to see a considerable level of demand for credit.
On the other hand, there is dull appetite for credit from the borrowers as the higher interest rates turn them away.
Sri Lanka’s household indebtedness has seen a spike in recent years due to excessive borrowings by the people for consumption purposes. But the level is still well below some of the frontier market household debts, the data showed.