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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka bank credit eases in June: data

Sri Lanka bank credit eases in June: data

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Aug 13, 2012 (LBO) - Loans from Sri Lanka's banking system fell to 13.5 billion rupees in June 2012, from 41.8 billion a month earlier with state credit no longer pressuring the banking system, while private citizens' credit remained positive, official data showed.

Total loans from commercial banks to private borrowers rose 19.0 billion rupees to 2,234.9 billion rupees in June up 31.6 percent from a year earlier, slowing from a 33.5 percent growth in May.

Credit to the state including state enterprises fell 5.5 billion rupees 1,285.9 billion rupees.

Bank credit to the central government fell 14.5 billion rupees to 1,010.3 billion rupees in June, up 37.5 percent from a year earlier, down from a 44.7 percent growth shown in May.

Credit to state enterprises continued to grow in June by 9.0 billion rupees to 275.6 billion rupees, up 77.8 percent from a year earlier but slowing from 107.7 percent from May.

Sri Lanka ran into a balance of payments crisis from mind 2011 due to heavy state borrowings, especially by energy enterprises which were using credit to manipulate tariffs.

Amusingly however, authorities and pro-establishment economist blamed car imports falling back to Mercantilism. Imports (and trade deficits) are secondary symptom of developments in the credit system.

The fall in loans to the state in June was also helped by an absolute fall of central bank credit to government (printed money) from 329.5 billion rupees to 324.2 billion rupees.

In 2011 the monetary authority sterilized foreign exchange sales with large volumes of printed money, to manipulate interest rates as state credit demand surged when oil prices rose and a drought increased thermal power generation.

The sterilized foreign exchange sales injected tens of billions of rupee reserves in the banking system giving 'deposits' to commercial banks to make new loans to both the state and private sector.

At the height of the sterilized foreign exchange sales crisis early in 2012 monthly credit volumes rose above 100 billion rupees.

Sri Lanka bank credit eases in June: data 12lboa10

But from February following a partial float of the currency (which slowed the injection of new rupees in the banking system) credit started to slow.

State energy enterprises also raised prices, reducing credit demand and also forcing a fall in non-oil imports, as citizens diverted their money to energy.

Analysts point out that in Sri Lanka the private sector itself is historically a net saver in the economy and is incapable of triggering a balance of payments crisis or a weakening the currency peg on its own, through the imports of cars or any other item.

Only the state (which runs a deficit budget) and state enterprises (which make large losses) can de-stabilize the monetary system sufficiently to force the rupee to fall. The rupee fell from 110 to 134 levels during the most recent balance of payments crisis.

Total credit to state and private borrowers fell from 140 billion rupees in January 2012, to 115 billion in February, 110 in March, 60.8 billion rupees in April, 41.8 billion rupees in May and now 13.5 billion rupees in May.

Now that credit growth has eased, analysts have urged the central bank to steadily sterilize small volumes of foreign exchange purchases (kill rupees) which will 'squeeze' outflows of dollars, allowing the exchange rate to appreciate.

Analysts have also asked the central bank to lift a credit ceiling on private borrowers as it may deprive credit to citizens for their high yield activities.

As long as banks only loan money taken as deposits from other customers (not injected central bank credit) the exchange rate will not be pressured.
http://lbo.lk/fullstory.php?nid=478903203

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