Sri Lanka’s once stubborn private sector credit has finally started to ease, a sign that the monetary policy tightening measures put in place finally are having a considerable effect on the country’s credit and money flows.
The latest data seen by Mirror Business showed that the growth in total credit extended to the private sector by the banks and other financial institutions has fallen to 15.4 percent in November 2017, a territory where the Central Bank desired at the beginning of the year.
This is a decline from 16.2 percent in October and 21.9 percent in December 2016.
The money supply measured by broad money or M2b slowed down to 17.9 percent in November on a year-on-year basis from 19.2 percent in October.
“The growth in broad money supply has slowed down substantially in November 2017 caused mainly by the deceleration in the growth of private sector credit extended by commercial banks as expected, responding to the tight monetary policy stance,” said the Monetary Board in their latest monetary policy review.
The Central Bank has raised benchmark short-term rates by 125 basis points since February 2016 and took other macro-prudential measures to quell the unsustainably high growth in private sector credit, which destabilized the economy.
But the effects of those measures were not felt until recently because of an inherent lag in monetary policy transition, which in Sri Lanka’s case runs up to 12 to 18 months.
Meanwhile, on a cumulative basis, Sri Lanka’s banks and other financial institutions have given out Rs.557.5 billion in credit to the private sector for their consumption and investment activities during the first 11 months of the year.
This is compared to Rs.676.2 billion private sector credit granted during the same period in 2016.
The Central Bank is likely to stay put on the rates during most part of this year as inflation remains elevated and any more leeway in money supply could shoot up the price levels.
Maintaining price stability is a core objective of any central bank and Sri Lanka’s Central Bank is moving towards a flexible inflation targeting regime by 2020.
The United State’s Federal Reserve is widely expected to raise its short-term rates at least thrice during 2018 and this rate path could also determine any future moves by the Central Bank of Sri Lanka.
Sri Lanka has outstanding sovereign bond issuances denominated in US dollars held by foreign investors.
Meanwhile, sector-wise credit flows up to end-3Q17 showed that credit to the industry and agriculture had grown by 22.4 percent and 20.8 percent, respectively but the credit flows to the services sector slowed to 12.2 percent largely due to the decline in credit to the financial and business services sub-sector.
Meanwhile, the credit under personal loans has grown by 16.5 percent in 3Q17, a slowdown from 2Q17.
A notable phenomenon was observed in pawning advances during 3Q17 as this category showed some robust growth of 13.4 percent during the period.
This is perhaps due to the tough economic conditions prevailed during the year and also the weather-related disruptions in the main harvesting regions.
Meanwhile, the total outstanding credit to the public corporations during the first 11 months fell by Rs.12 billion to Rs.483 billion, while the net credit to the government rose by Rs.194 billion to Rs.2,166 billion by end-November 2017.