CB now expects Rs.800bn to be unleashed as private credit this year

 In what appears to be a sign of renewed optimism for the economy to jump start from the perceived setback in the second quarter, the Central Bank indicated it expects the banking sector to unleash anywhere north of Rs.800 billion in fresh private sector credit through this year. 

Albeit some slowdown during April and May, the Central Bank remains largely upbeat about the pace of private sector credit, which hit a cumulative Rs.330.6 billion in the five months to May 2021, recording a 10.5 percent growth, the highest year-on-year growth since March 2019, before the Easter attacks derailed the recovery momentum. 

Speaking last week at a virtual press briefing following the release of the fifth Monetary Policy review, Central Bank Director Economic Research Dr. Chandranath Amarasekara hinted at an “additional” credit disbursement of Rs.800 billion through 2021. 

“We expect this trend to continue year-on-year,” Dr. Amarasekara said adding that “we expect about an additional Rs.800 billion to be added to the economy as private sector credit”.  It wasn’t immediately clear if he referred to the remainder of the year from June through December 2021 or the entirety of the year, including the amount of credit granted up to May when the data is available. 

In any case, Rs.800 billion in fresh credit is still higher than the scaled down Rs.750 billion credit target of the Central Bank but lower than the original target of Rs.865 billion.  Reflecting the sentiments of the Central Bank, banks were seen adding capital at a faster clip from both foreign and domestic sources to bolster their capital bases, which will in turn provide them more wiggle room to lend as they look to make up for the lost growth during the past couple of years.  The pace of private sector credit growth is an important barometer for the overall economy, as it reflects the amount of fresh money being loaned out for investments, working capital and consumption—the trifecta of activities, which determines the dynamism of the broader economy. 

However, on the downside, the higher private sector credit could pressure the currency, as some of that money could end up being spent on funding imports.  

Meanwhile, inflation, another caveat, which is already haunting the economic actors by eroding the real value of money, could become more pronounced with more money, as private loans increase money supply. 

However, the Central Bank maintains that there are no demand-side price pressures yet and they would guard against such pressures if they deem more sustained than transitory.