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Sri Lanka credit to business slows; dollar loans contract in Sept
26 Nov, 2012 06:35:12
Nov 26, 2012 (LBO) - Sri Lanka's credit given to private business from banks commercial banks fell to 9.8 billion rupees in September 2012, the lowest since 2009, with dollar denominated loans contracting, though the rupee book was still growing, official data showed.
Sri Lanka's credit contracted in nominal terms during 2009, following the last balance of payments crisis triggered by sterilized foreign exchange sales by the Central Bank.

By end-September 2012 credit to private business rose 25.5 percent from a year earlier to 2,294.9 billion rupees, slowing from 28.7 percent a month earlier.

Credit from rupee books of banks rose 28.2 percent to 2,112.6 billion rupees from a year earlier with growing 29.30 billion rupees in new loans being given.

But dollar denominated loans contracted by the equivalent of 19.5 billion rupees to 182.3 billion rupees.

In September 2012 Sri Lanka's rupee peg appreciated in the wake of slower credit and outright sales of central bank held treasury bills or sterilized foreign exchange purchases.

In that money central bank credit to government (printed money) fell to 345.4 billion rupees, from 355.4 billion a month earlier.

In October the Central Bank started to print money into banks again through term auctions at around 200 basis points below market gilt repo rates of the same tenor, undermining the credibility of the peg and renewing speculative pressure.

Analysts say authorities usually puts pressure on the currency peg by forcing buyers of Treasury bills to bid low which prevents rates from going up to increase savings and reduce consumption to fund credit demand.

The Central Bank then prints money outright to buy Treasury bills outright triggering full blown balance of payments crises.

But while pressuring T-bill buyers to bid low may be understandable, since authorities were in effect buying money, market participants were foxed when pressure was applied on them to bid low, when the Central Bank was selling money through term auctions.

Amused dealers said they were happy to comply, though all the principles of auctioning and demand and supply theory they had learned from schoolroom were turned upside down.

However in the ensuing weeks the rupee then weakened from around 128.50 to the US dollar to around 130 rupees.

Sri Lanka has a soft-pegged exchange rate regime, designed by the architects of the failed Bretton Woods system which brought high inflation, currency depreciation, poverty and trade restrictions to the entire world in the decades after the Second World War.

Sri Lanka abolished a currency board (hard peg) which had kept exchange rates stable in inflation low in 1951 to join the failed Bretton Woods system which allowed the state to deficit spend, print money and depreciate the currency.

In September credit to state enterprises rose 81.1 billion rupees to 271.9 billion rupees. Many state enterprises are making losses, particularly energy enterprises, which are used by authorities to manipulate tariffs with credit and trigger balance of payments crises.

From mid 2011 Sri Lanka printed large volume of money, driving credit from banks to the state and business to never before seen levels, losing two billion US dollars in foreign reserves as newly minted money came up for redemption in forex markets.

Shortly before the rupee was partially floated and energy prices hiked, to reduce credit demand in February 2012, monthly credit (including new central bank credit or printed money) rose to 140 billion rupees in January.

Credit to the central government was hardly changed at 1,035.1 billion rupees moving up 3.6 billion rupees from a month earlier. Total credit to the government was up 30 percent from a year earlier, slowing from 33.4 percent a year earlier.

The Central Bank said in its monetary policy review for November that state credit had again picked up.

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