It appears that the Central Bank may need to sharpen its monetary policy tools, as credit to private sector has continued to grow stubbornly, a scenario that could drive the country’s inflation and imports beyond a tolerable level.
According to provisional data, the amount of private sector credit granted by the banking sector in February has returned to its previous higher levels.
In February, banks have granted as much as Rs.71 billion to the private sector recording a 21 percent growth year-on-year, close to four times the amount granted in January.
In January, the Monetary Board left its key policy rates unchanged as they thought they received some breathing space when the private sector credit eased to Rs.18.9 billion from as high as about Rs.65 billion a month ago in 2016. But the Monetary Board’s hopes appear to have short-lived as they decided to tighten the monetary policy when they met in the following month as the early data indicated a surge in private credit.
The February figures for banking sector credit may have worried the Monetary Board because this growth was much higher than the growth of around 15 percent anticipated by them.
In 2016, Sri Lanka’s private sector credit reached an all- time high of Rs.755.5 billion, surpassing the previous high of Rs.692 billion in 2015 in spite of several rounds of monetary tightening, calling the efficacy of the monetary policy tools into question.
Meanwhile, the growth in money supply in the economy as measured by the broad money (M2b) also expanded by as much as 18.0 percent in February although slowing from 18.4 percent in January.
However, this is much higher than the desired level of growth in M2b by the Central Bank to maintain the inflation at benign levels.
The expansion in monetary aggregates has resulted from both the private sector credit as well as public sector credit indicating higher borrowings by the state and state-owned enterprises (SoEs).
For decades the fiscal excesses have undermined the efficiency of the monetary policy actions of the Central Bank in Sri Lanka as the latter is forced to accommodate the financing needs of the government mostly by way of printing money.
This pushes up inflation and ultimately results in balance of payment crises because such moneys created always induce higher imports thereby putting pressure in the rupee and the gross official reserves.
Sri Lanka’s gross official reserves have come down to US $ 5.1 billion by end-March from US $ 6.0 in January.