Credit on a roller coaster!

• CB says despite checks, credit growth continuing at undesired pace
• Net credit to Government up substantially by Rs. 136.3 b during the first two months of 2012
• Credit to private sector up year-on-year, by 34.4%
• Ups policy rates again as a fresh effort
• Government revenue drops; public expenditure to be rationalised; new taxes to help
• Domestic foreign exchange market has shown clear signs of stabilisation
• Economy clocks highest post-independence growth rate of 8.3% in 2011

Credit growth in Sri Lanka appears to be on a roller coaster as recent curbs haven’t produced desired results yet, prompting the Central Bank yesterday to increase its policy rates as a further effort.

In its statement following the April Monetary Policy Review meeting, the Central Bank said: “Notwithstanding the increase in the Central Bank policy interest rates in February 2012 and the Direction issued to restrain the growth of credit extended by licensed banks, there are still some signs that credit growth is continuing at an undesired pace.”

“Therefore, the Monetary Board is of the view that a further adjustment of policy rates of the Central Bank is warranted to ensure a smooth deceleration of credit growth through the year in order to achieve the target set for end year and to anchor inflation expectations,” it added.

The bank said Net Credit to the Government (NCG) increased substantially by Rs. 136.3 billion during the first two months of the year, while credit extended to the private sector also increased, year-on-year, by 34.4%.

“This increase, amounting to around Rs. 100 billion in the first two months of the year, has resulted in the continued high growth of monetary aggregates, although the recent policy measures introduced by the Central Bank are expected to decelerate the expansion in broad money supply in the near term,” the statement added.

The Central Bank said towards such outcome, it is essential that the current shortfall in Government revenue is effectively addressed and public expenditure is further rationalised, so as to significantly lower the reliance on bank sources to finance the Government budget deficit.

“Such a course of action would reverse the trend observed in the first quarter of 2012, and in that context, the recent upward revision of customs and excise duties on selected items by the Government is a display of its commitment to the necessary fiscal consolidation process,” it added.

To achieve its objectives the Monetary Board, yesterday decided to raise the Repurchase rate and the Reverse Repurchase rate of the Central Bank by 25 basis points and 75 basis points respectively, to 7.75% and 9.75%, effective from the close of business on 5 April 2012.

In its statement the Central Bank also said the economy registered its highest post-independence growth rate of 8.3% in 2011, over the 8% growth in 2010, with increased contribution from Industry and Services sectors.

The growth in the Agriculture sector was subdued, but was adequate to enforce a substantial downward pressure on domestic commodity prices.

While year-on-year non-food inflation increased in March 2012 due to the full impact of the adjustment of domestic energy prices and bus fares, year-on-year food inflation remained negative for the third consecutive month. Overall, the year-on-year change in the Colombo Consumers’ Price Index increased to 5.5% in March 2012 from 2.7% in February.

Focusing on the contentious issue of reserves, the Central Bank said domestic foreign exchange market has shown clear signs of stabilisation following the expected volatility during the early stages of allowing greater flexibility in the Rupee/US dollar exchange rate.

Accordingly, the Rupee, which depreciated against the US Dollar to Rs. 130.41 on 21 March, appreciated by 3.94% during the period from 21 March to 4 April 2012 to reach Rs. 125.47.

The increased foreign exchange inflows contributed to this stabilisation, while prudential measures implemented by the Central Bank supported this development.

Significant foreign inflows in the first three months of the year included the inflows to the Government securities market amounting to $ 400 million and inflows to the Colombo Stock Exchange of $ 164 million. Thereafter, on 2 April 2012, the eighth tranche under the IMF-SBA facility amounting to $ 427 million was also received.

These and other foreign receipts to the private sector and the Government have now raised the gross official reserves (without ACU balances) to approximately $ 6.1 billion as at 4 April 2012, which is equivalent to 3.6 months of imports.

The next monthly statement on monetary policy would be released on 15 May 2012.

In February, the Monetary Board increased the Rep and Reverse Repo rate by 50 basis points each. It also decided to limit credit growth of banks to 18% in 2012 and for those which can secure funds from abroad the limit was increased by 5% to 23%.

President Mahinda Rajapaksa yesterday kicked off the third phase of the ‘Divi Neguma’ national program, which aims to boost household-driven economic units in the country by planting a drumstick sapling at President’s House. Under the third phase, the Ministry of Economic Development has made arrangements to uplift the economic standards of 2.5 million families throughout the country. Secretary to Ministries of Finance and Economic Development Dr. P.B. Jayasundera, who along with Central Bank Governor Nivard Cabraal has come in for criticism by some for recent setbacks in the economy, also participated in the event – Pic by Sudath Silva.