Credit Trend

Mar 10, 2012 (LBO) – Credit to business from Sri Lanka’s commercial banks fell to 44.5 billion rupees in January 2012 from 60.2 billion rupees a month earlier, but credit to the state zoomed to a new monthly peak 73.7 billion rupees, official data showed. Rising state borrowings from the banking system, particularly central bank credit (printed money) put pressure on Sri Lanka’s currency peg with the US dollar.

January’s 96.5 billion rupee increase in loans to the state included 25 billion rupees of central bank credit (printed money) to government.

In addition to money injected to sterilize interventions, the Central Bank also gives a so-called ‘provisional advance’ in January and sometimes makes profit transfers.

Analysts have warned that such liquidity transfers in times of credit demand, results in immediate fresh pressure on the country’s currency peg and foreign reserve losses of equal amount when the peg is defended.

The rupee has fallen from around 109 rupees from mid 2011, to around 121 against the US dollars in March.

In February Sri Lanka raised both power and petroleum prices in a bid to reduce credit growth. The central bank asked banks