Tamed credit growth proof of prudent monetary policy mgt.: Central Bank

• November private credit growth falls to 15.4%, not far from CB’s 15% target
• Credit to services sector slows; credit to agriculture and industrial sector grows 
• Keeps key policy rates unchanged despite repeated calls by IMF for more tightening 

Private credit growth has reached within arm’s length of Central Bank targets since monetary policy and government loan-to-value (LTV) policies on vehicles have fully transitioned into the market, the Central Bank said.

Private credit growth fell to 15.4 percent year-on-year (YoY) in November, while in absolute terms  Rs.61.1 billion in credit was extended during the month.
Dr. Coomaraswamy said that the Central Bank has been attempting to get credit growth to fall below 15 percent after reaching a recent peak of 28.5 percent in July 2016.

By the third quarter of 2017, credit growth to the services sector, which had absorbed most of the credit growth over the last few years, fell to 12.2 percent YoY, thereby pulling down overall credit growth, despite credit extended to the industrial and agricultural sectors increasing by 22.4 percent YoY and 20.8 percent YoY respectively.

“My understanding— and this is a tentative one, because I’ve seen this data quite recently— is I suspect that particularly the non-bank financial institutions that borrowed heavily, their borrowings have come down, because imports have come down, leasing activity is probably more muted,” Dr. Coomaraswamy said.
Dr. Weerasinghe said partly the slow economic growth, and partly the loan-to-value ratios on vehicles have resulted in lower leasing activity for finance companies.
Dr. Coomaraswamy said that higher credit growth in the agriculture and industrial sectors is a welcome development, showing robustness in the economy.
“It’s encouraging that the real economy, particularly the agriculture and industrial sector, has continued to have credit growth,” he said.

However, he admitted that this effect may have been due to the agriculture and industrial sectors—particularly the agriculture processing industries which makes up 20 percent of the industrial sector—borrowing higher amounts to make up the working capital they had not built up due to weather related disruptions limiting agricultural activity for three consecutive seasons. Inflation, based on the Colombo Consumer Price Index meanwhile edged down to 7.6 percent in November compared to 7.8 percent in October, remaining stubbornly above the 4-6 percent target of the Central Bank.

This was due to supply side disruptions increasing prices of food and other volatile products, despite benign inflation across most other items.

Dr. Coomaraswamy said that inflation is expected to fall in line with the targets in the first quarter of 2018, although the Central Bank will closely monitor the effect of this supply driven, temporary inflation on wage expectations, and anchor such expectations.

The Central Bank decided to keep its policy rates unchanged yesterday, continuing the interest regime set since March 2017, despite continuous warnings of the International Monetary Fund to raise rates to contain inflation and private credit.

Therefore, the Standing Deposit Facility Rate of 7.25 percent, the Standing Lending Facility Rate of 8.75 percent and the Statutory Reserve Ratio of 7.50 will stand.
Dr. Coomaraswamy said that maintaining the current rate without further hikes would be growth positive.

“The most concerning thing is the growth figure. The 3.3 percent growth in the third quarter this year clearly is very disappointing, and this year we’re going to end up at best 4 percent. It’s going to be a little less than 4 percent if one is honest, which is less than we expected,” he said.

At the start of the year, Dr. Coomaraswamy who had set a growth expectation of 5 percent, before adjusting it to between 4.5-5 percent in July, and later in August, said that growth would be below 4.5 percent.

However, rates would not be eased to give an artificial stimulus to the weather-battered economy according to Dr. Coomaraswamy, who said that economic reforms should drive growth.

He said that with the current economic reform efforts, and the macroeconomic indicators which are trending towards the positive, the economy is continuing to stabilize in broader terms.