The government took 79 % (or Rs 369.1 billion) of the total new loans generated by the domestic banking system during the first eight months of this year, which amounted to Rs 464.8 billion. New loans to the private sector during this period amounted to just Rs 78.7 billion.
Total outstanding credit form domestic banks to the private sector grew by eight per cent year-on-year to Rs 2,250.8 billion as at end August 2013, down from a 8.9 % growth rate a month ago, and total outstanding credit to the government grew 69.5 % year-on-year to Rs 964.2 billion, up from a 68.8 % growth rate a month earlier.
Credit to public corporations grew 94.7 % year-on-year to Rs 130.2 billion as at end August 2013, down from a 100.5 % growth rate a month earlier.
The Central Bank, in a move which surprised markets, cut monetary policy rates by 50 basis points in October so as to boost private sector credit growth and stimulate the economy; thereby reducing rates by 125 basis points from a year ago.
The government settled loans worth Rs 9.6 billion to the Monetary Authority in August, repaying loans worth Rs 17 billion since January.
Total outstanding credit extended to the government by the Monetary Authority reached Rs 186.9 billion as at end August, down 40.9 percent from a year ago.
Earlier this year Standard Chartered Bank said it expected inflation to spike in the fourth quarter and private sector investment to pick up from policy easing and lower interest rates.
The International Monetary Fund, however, warned against monetary policy easing so as to contain inflation.
However, the Central Bank remains optimistic.
“Broad money growth for August 2013 was in line with projections for the year, indicating that the current monetary conditions could support higher growth in the second half of 2013. A sharp moderation in credit obtained by public corporations from the banking sector during August 2013, due to improved cash flow positions, was also expected to continue and thereby further alleviate demand side pressures and release resources for private sector investments. Further, policy easing since December 2012 had resulted in a reasonable downward adjustment in short term interest rates, including call money market rates and prime lending rates, with space remaining for further adjustments in longer term lending rates,” the Central Bank said in its monetary policy review last month.
“During the year, the conduct of monetary policy has been aimed at providing the necessary impetus to allow for economic growth to accelerate, in the absence of demand pressures. In that context, the policy easing in December 2012 and May 2013reduced the borrowing costs of economic agents gradually, thereby encouraging private sector investments. These policies have strengthened the macroeconomic environment which is likely to enable the economy to comfortably exceed a GDP growth rate of 7 per cent in 2013,” the Central Bank said.