COLOMBO: Sri Lanka’s bank credit surged to Rs110 billion in June 2016 from Rs44.6 billion a month earlier, including Rs48 billion in Central Bank credit, official data showed.
Private sector credit grew by Rs75.9 billion to Rs3,798.10 billion in June, up 28.2 percent from a year earlier. Credit to state enterprise fell Rs4.8 billion to Rs484.9 billion in June 2016, from May. With finances at Ceylon Petroleum Corporation improving, there have been net paybacks of debt.
If the rupee did not collapse from Rs131 to Rs147 to the US dollar, finances of state enterprises would have been even better. However, in late August, the government suddenly raised taxes on diesel, which may tighten cash flows.
Central Bank credit to the government (printed money) grew Rs48.9 billion to Rs456.1 billion, up 30.8 percent from a year earlier, driving credit from the banking system to the state. But loans from ordinary banks to the state fell from Rs1,558 billion to Rs1,549 billion.
Sri Lanka, which has a soft or unstable peg with the US dollar, triggers balance of payments crises, currency collapses and inflation above the US, primarily by printing large volumes of money to keep interest rates down, drive up credit and bust the currency.
When money is printed, excess liquidity in the banking system goes up with rupee reserves created by the Central Bank, which then generates money private credit, unless recipients of the printed money (usually salaries of state workers) spend them directly on imports.
However, in June, the Central Bank reduced permanent accommodation of liquidity shortages by rejecting bids for Treasury auctions and instead started to give money overnight, in a major policy tightening move.
Analysts have pointed out that the failed Treasuries auctions, with real bids rejected to keep interest rates down, is the Central Bank’s mostly deadly destabilising monetary policy tool, which is not even formally acknowledged in text books. If Treasury bills are bought to print more money, even large rates hikes of 200 to 300 basis points will not end a balance of payments crisis.
During June, the Central Bank’s Treasury bill stock (which is a proxy for printed money and reserve appropriations to settle state foreign loans) rose from Rs248 billion to Rs273 billion. Liquidity, which became plus Rs13 billion on June 30 from a Rs20 billion shortage two days earlier, again became Rs21 billion short on July 01, which analysts say could be due to an outflow.
In July, however, Central Bank credit started to come down, after peaking at Rs290 billion during the current balance of payments crisis.
