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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka lending rates to ease with lower state borrowing

Sri Lanka lending rates to ease with lower state borrowing

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LSE

LSE
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
June 7, 2013 (LBO) - Sri Lanka's bank lending rates are expected to ease in the second half of 2013 with reduced bank borrowings by the state, the Central Bank said holding policy rates in June, after a cut last month.
In May the monetary authority cut its policy rate corridor by 50 basis points.

The reverse repo rate at which money is given to banks for liquidity shortfalls and indicates a ceiling overnight rate in the interbank market was cut to 9.00 percent and the repo rate at which excess money is withdrawn was cut to 7.00 percent.

Liquidity auction rates at which cash was withdrawn and injected have ranged from 7.8 percent to 8.2 since a May rate cur forming a narrower effective signal rate corridor.

This week a repo auction rate fell to 7.6 percent, amid excess liquidity dragging down short term rates further.

The longer term rates however has been high mostly due to state borrowings to bridge a budget deficit and borrowings from state banks by loss making state enterprises.

"Within the overall monetary expansion, the public sector has absorbed a greater portion of domestic credit, in comparison to the credit extended to the private sector by commercial banks during the first four months of the year," the Central Bank said in its June monetary policy announcement.

"At the same time, during the year 2013, a compositional shift of credit disbursements by commercial banks is considered likely, with the expected easing in public sector borrowing during the remainder of the year and the adjustment of market lending rates, which would provide the required boost to the longer term credit growth to the private sector.

Growth in credit to the credit to the private sector has slowed 10.2 per cent in April 2013 from 10.9 per cent in March, the Central Bank said, partly reflecting the effect of the high base.

Analysts say it is important for heavy state borrowings to 'crowd out' private credit and match the deposit generating ability of banks (either from domestic or foreign sources) through a market clearing interest rates at each maturity.

Any attempts by a central bank to inject printed money through Treasury bill purchases to 'have the cake and eat it' will result in higher inflation, exchange rates weakness, or foreign reserve losses.

When attempts are then made to stop exchange rate depreciation and inflation through defending a dollar peg, foreign reserves are lost.

Sri Lanka's most widely watched inflation index picked up to 7.3 percent in May 2013 from 6.4 percent in April as a power price hike was brought into the index.

The Central Bank said inflation had been at 'single digits' for 52 months.

"Going forward, inflation is expected to remain at single digit levels, supported by supply side improvements and the absence of demand driven inflationary pressures," the monetary policy statement said.

Analysts say it is important for the Central Bank not to purchase Treasury bills and inject term money into the banking system, even if policy rate are cut.

Sri Lanka's rupee fell in 2012 as large volumes of bank credit was taken to manipulate energy prices which were ultimately accommodated by the Central Bank through purchases of Treasury bills with printed money, driving credit to historic heights.

The Central Bank said it had brought about 580 million US dollars from forex markets this year and foreign reserves were 6.9 billion rupees by end April 2013, which was equal to 4.4 months of imports.

In 2011 and 2012, imports rocketed up due to the excess demand created by over two hundred billion rupees pumped into the economy by the Central Bank to sterilize foreign exchange sales, losing about two billion US dollars in the process.

In 2013 the process has largely reversed allowing reserves to be built up as liquidity from inflows was killed by selling down the Central Bank's Treasury bill stock.

Source :
http://www.lankabusinessonline.com/news/sri-lanka-lending-rates-to-ease-with-lower-state-borrowing:-central-bank/1044852152

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