Amidst elevated market lending rates, private sector credit contracted notably: CBSL

May 31, 2019 (LBO) – Sri Lanka’s Central Bank on Friday said the market lending rates remained downward rigid, despite the measures already taken while the private sector credit showing a notable contraction.

Sizable liquidity injections through the reductions in the Statutory Reserve Ratio (SRR) along with appropriate and prudent open market operations (OMOs) have resulted in a reduction in the Average Weighted Call Money Rate (AWCMR) by around 50 basis points so far in 2019.

The Central Bank said yields on Government securities have also adjusted downward sharply during the year.

Considering the high nominal and real interest rates on deposit and lending products, the Central Bank imposed maximum interest rates on deposit products in April 2019, thus reducing the cost of funds of financial institutions, enabling them to reduce lending rates and enhance credit flows to the real economy.

“In spite of liquidity injections, decline in AWCMR and yields on Government securities, as well as the recently introduced maximum interest rates on deposit products, market lending rates have failed to show any sign of commensurate downward adjustment,”

“Following a higher than projected credit expansion, particularly in the latter part of 2018, credit extended to the private sector by commercial banks contracted, in absolute terms on a cumulative basis, during the first four months of 2019.”

High market lending rates, sluggish growth in economic activity, subdued business confidence, as well as the settlement of arrears by the government on account of various projects which enabled repayments to the banking sector, were amongst the factors which contributed to this contraction.

Driven by the slowdown in private sector credit, the year-on-year growth of broad money (M2b) also decelerated so far in 2019.

Meanwhile, the improvement in the trade deficit is likely to negate the adverse impact on the current account arising from the slowdown in services exports caused by the contraction in tourism in 2019.

It is expected that earnings from tourism would rebound with the support of improved security conditions and the relaxation of travel advisories by several key countries of origin of tourists, along with recently introduced policy measures and promotional campaigns to revive the sector.

The Easter Sunday attacks have affected confidence and sentiments of economic agents, particularly disrupting tourism and related activities.

Although normalcy is gradually returning to economic activity, a lower than initially projected growth could be anticipated during 2019.