Credit growth too high says CB Governor | Sunday Observer

Credit growth too high says CB Governor

The growth in credit, which is stubbornly high, is a key issue the Central Bank will need to address urgently and curtail further expansion to prevent growth in inflation.

Credit to the private sector which stood at 21.0% in February and 20.9% in January this year decelerated to 20.4% in March according to Central Bank data released last week.

However, financial market analysts said credit expansion will boost inflation which is currently above mid single digit rate. Headline inflation and core inflation which showed an increasing trend in the first quarter this year moderated in April.

Headline inflation declined on a year-on-year basis to 6.9 per cent in April 2017 from 7.3 per cent in March 2017 and the CCPI based core inflation also decelerated to 6.8 per cent in April from 7.3 per cent recorded in the previous month. Central Bank Governor Dr. Indrajit Coomaraswamy said, “Ideally we would like to see overall credit to be at around 15 percent and of that a fair share going to the private sector.”

Speaking at the ‘Recent Macroeconomic Developments and Review of the Monetary Policy Stance’ last week, the governor said two State banks were left with lot of cash and that was pushed to the private sector as certain Corporations such as the Ceylon Petroleum Corporation made profits.

As a result, lending to State corporations came down. Overall credit growth stood at 18 percent,” the governor said.

However, broad money growth year-on-year accelerated to 20.0% in March compared to 18.0% in February and 17.7% in January this year. The expansion in credit to the private and public sectors contributed to the high monetary growth.

Raising the country’s foreign reserves, a key policy requirement under the Extended Fund Facility of the International Monetary Fund, declined to USD 5 billion at end of April from USD 6 billion at the end last year.

However, the Central Bank governor was upbeat about recording USD 7.2 billion foreign reserves by the end of the year given the USD 1.5 billion raised through the international sovereign bond, USD 450 million through the syndicated loan, USD 1.2 billion through direct purchases from the market, USD 500 million from the sale of non-strategic assets and the initial USD 100 million and then USD 300 million which would together make USD 400 million with the Hambatota port deal that would take place this year.

“Our real challenge is to increase exports,” the governor said.

The drop in exports for the second consecutive year along with low foreign remittances from expatriate workers contributed to the trade deficit which widened to USD 743 million in February this year.

Expenditure on imports increased 11.9 percent to USD 1,611 million in February while earnings from exports contracted 2.7 percent to USD 868 million in the same month.

The cumulative trade deficit increased to US dollars 1.7 billion in the first two months of this year.

The need to reconsider the current auction system and the safety of the Employees Provident Fund (EPF) surfaced at the media briefing, to which the governor responded stating that a new auction system, termed ‘Underwriting System’ for the government securities market will be introduced in July.