- July net credit to private sector at just Rs.13.2bn, down from Rs.73.8bn in June
- Central Bank appears uneasy over sluggish rate of growth in private credit
- Business sentiment turns sour amid elevated prices, taxes and interest rates
- Current conditions may prompt further policy easing at upcoming October meeting
Credit to the private sector by commercial banks continued to recover in July but at a significantly slower pace compared to the previous month when credit started rebounding after over a year of what was considered the most severe credit contraction in the economy.
The commercial banks on a net basis extended Rs.13.2 billion in fresh credit to private businesses and individuals, slowing from Rs.73.8 billion increase seen in June reflecting that a sustained credit expansion in the economy is still a long way from materialising.
The persistently high borrowing rates and economic uncertainties stemming from the unpredictability and significant fluctuations in the energy and commodities markets are casting a shadow over both business and consumer spending, potentially dampening economic recovery.
Prices that experienced substantial increases last year continue to rise, though at a mid-single-digit rate, which is what official price indices capture. However, people’s incomes have not kept pace with these price hikes, making it difficult for them to regain their pre-crisis living standards.
Frequently revised fuel prices are worsening the situation, as they create disruptions throughout supply chains, further contributing to price increases. Sri Lanka’s fuel prices are currently linked to global fuel prices.
The business confidence has taken a dive lately despite the sharp policy rate cuts and deceleration in inflation.
Although economic activity has undeniably improved compared to a year ago, the latest LMD-Nielsen IQ Business Confidence Index (BCI) survey reveals a growing number of businesses anticipating a deterioration in both the overall economy and their own business prospects over the next 12 months.
They cited the persistently elevated inflation and the higher taxes as the biggest challenges they face followed by higher interest rates which puts a damper on both new investments and consumption.
While there has been a modest reduction in lending rates from their recent highs, lending rates, especially for credit extended to small and medium enterprises, remain stubbornly high. This is primarily due to concerns about the creditworthiness of these businesses and uncertainty surrounding the sustainability of economic stability.
Both survey data and anecdotal reports suggest that the optimism which prevailed coming into the second half of the year have soured as many believe the conditions to get worse in the coming months.
These apprehensions and unpredictability keep both borrowers and lenders on the sidelines, causing both business and consumer spending to suffer and thereby the credit flows.
Central Bank in their most recent Monetary Policy announcement said that a sustained recovery in credit to the private sector is yet to be observed.
Taking a swipe at the Central Bank and its policy efficacy, the former Central Bank Governor, Ajith Nivard Cabraal recently asked the officials to walk the talk on interest rates as the current rates are not at all conducive to jump-start growth. He also asked how can the Central Bank ask banks to cut lending rates when they themselves borrow at 19 percent on behalf of the government, which is exponential. It was quite surprising why the Central Bank did not follow through with another policy rate cut at their August meeting when they had anchored inflation expectations at their desired mid-single digit levels.
Analysts see another sizable cut in the policy rates at their October meeting due to limited progress made in the economy from the previous two rate cuts.