Credit Trend

Mar 28, 2011 (LBO) – Sri Lanka loans to business from commercial banks rose 28.1 percent in January 2011 from a year earlier to 1,530 billion rupees, central bank data showed as inflation concerns also rose in the island.

Under Sri Lanka’s flawed monetary law, which critics say has made the country prone to high inflation, the Central Bank is forced to print and give to the finance ministry up to 10 percent of its expected revenue for the year, in a deadly ‘quantity easing’ exercise.

The Central Bank usually sterilizes the money created (usually after it is spent once) in a bid to reduce the inflationary impact of the move, thought it is not clear what action it can take when excess liquidity is already high.

The monetary authority also extends credit to repay foreign loans, but analysts say such actions have a dampening effect on inflation.

Banks loaned 36.3 billion rupees from their rupee books taking the total to 1,494.2 billion rupees and the equivalent of 5.3 billion rupees from their dollar books, taking the total to 165.7 billion rupees.

Sri Lanka’s inflation rose to 7.8 percent in February 2011, against an effective policy ‘repo’ rate of 7.0 percent at which excess liquidity is drained fro