ECONOMYNEXT – Sri Lanka’s private credit from commercial banks grew only 2.5 billion rupees in May 2022, amid a soft-peg collapse the lowest since a 2020 strict lockdown when credit turned negative for three months, while credit to government also fell, official data showed.

Sri Lanka’s private credit grew to only 7,754.5 billion rupees in May 2022 from 7,752.5 billion rupees in April with rupee denominated loans barely growing from 6,659.8 billion rupees to 6,659.8 billion rupees.

Loans dollar banking units to private sector fell to 794.6 billion rupees from 797.5 billion rupees in May which in dollar terms reflects a fall of about 130 million US dollars based on official end month exchange rates.

Meanwhile credit to state enterprises grew to 1,750.1 billion rupees in May from 1,725 billion rupees in April with rupee denominated debt rising by 71.6 billion rupees in May.

While the Ceylon Petroleum Corporation has raised prices, the Public Utilities Commission has failed to hike electricity prices for 7 years, leading to higher borrowings from banks, leading to pressure on interest rates and also money printing when rate rises are resisted.

State enterprise loans from foreign currency banking units fell to 222.1 billion rupees in May from 268.5 billion rupees a month earlier indicating a fall of around 160 million US dollars.

Credit to government fell marginally from 6548.1 billion rupees to 6,499.1 billion rupees, with both domestic and foreign banking units contributing.

Net central bank credit to government also marginal, though the central bank bought some bonds outright injecting permanent money into the banking system and reducing overnight injections.

In May Sri Lanka imported oil on a credit line from India, and state-run Ceylon Petroleum Corporation gave the balance rupees from customer sales to the Treasury after covering its losses.

However in June the credit line ran out.

There is another credit line for essential services which will bring some money to the Treasury as long is it used by private sector who will pay rupees to the government.

Sri Lanka’s rupee collapsed from 200 to 370 to the US dollar in a botched float after March though interest rates were raised in April to slow private credit and help save the soft-peg to the US dollar.

Sri Lanka’s private credit and the broader economy has to be smashed to pay state worker salaries without printing money try and save a soft-pegged exchange rate regime in 70 years of monetary instability since a soft-peg was set up in 1950.

The economic smashing has to be greater than in the past due to existence of a surrender requirement that pushes down the rupee, as well as delays in raising rates.

Soft-peggers call monetary instability ‘macro-economic instability’ and also manage to transfer the blame to imports and tax payers though private citizens are net savers and who have no ability to print money and de-stabilize the balance of payments and impose exchange and trade controls.

In May the rupee was transacting around 380 to the US dollar when a 360 to the US dollar and Undiyal premiums were falling, when a guidance peg was slammed at 360 to the US dollar with a surrender requirement still in place.

Sri Lanka is in a severe monetary crisis, with rising prices increasing malnutrition due to the collapse of a soft-peg after two years of money printing and failed float with a surrender requirement.

Inflation topped 50 percent in June.

Soft-pegs or flexible exchange rates cooked up in Latin America and the US after the Great Depression are peddled to third world countries where ‘economists’ have ‘fear of floating’ and ‘fear of currency boards’ and adopt unstable regime with anchor conflicts instead. (Colombo/July04/2022)