Sri Lanka’s credit expansion slower in July

Sept 19, 2011 (LBO) – Sri Lanka’s commercial banks loaned 26.9 billion rupees to private business in July 2011, down from 39 billion rupees a month earlier and credit to the state fell, following the sale of a soveriegn bond, official data showed. Central Bank credit to government – usually a red flag of impending economic pressure – rose to 96.6 billion rupees from 90.4 billion rupees a month earlier.

Until July 27 however central bank’s governemtn Treasuries portfolio had risen to about 15 billion rupees, until they were flushed out by dollar bond proceeds.

Analysts had warned that the effect of the bond would be temporary as pressure was developing on the balance of payments.

By September 16, the Central Bank credit to the economy has rapidly increased with its Treasury bill stock rising again to 37.2 billion rupees. Excess liquidity had fallen to 36 billion rupees.

Credit to private business rose 34 percent in July from a year earlier to 1,730 billion rupees, only slightly slower than the 34.4 percent rate a month earlier.

Central Bank governor Nivard Cabraal said he expected credit expansion to slow towards December.

Credit to the state fell to 731.2 billion rupees by end July 2011 from 734.8 billion rupees in June. Credit to state enterprises fell steeply to 137.9 billion rupees from 149.5 billion rupees a mont earlier.

On July 28, Sri Lanka received the proceeds of a billion dollar soveriegn bond, which would have allowed the state to repay bank credit and pay some overdue accounts, analysts said.

Excess liquidity in the banking system which fell to 23.5 billion rupees in July 27 amid a heavy defence of Sri Lanka’s currency peg rose to 77.9 billion rupees a day after part proceeds of a billion dollar sovereign bond were converted to rupees.