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Private sector borrowing continues downward trend


By: Staff Writer

Colombo (LNW): Sri Lanka’s bank may need a 1.4 trillion rupee capital injection after bad loans from a currency crisis and debt -restructure hit their balance sheets, according to an analysis by the International Monetary Fund.

Private sector borrowing from the banking sector continued its dip in April amidst the prevalent high interest rate regime and contraction in the economy.

As per the Central Bank data, outstanding credit extended to the private sector declined by Rs. 43.2 billion in April 2023 to Rs. 7.1 trillion.

Credit to the private sector from the banking sector has been decelerating since June 2022 with the biggest drop of Rs. 107.6 billion in March due to high interest rate environment and downturn in the economy according to analysts.

As at December 2022 the outstanding amount was Rs. 7,426 billion (a peak of Rs. 7.6 trillion in August) as against Rs. 6,981 billion in 2021.

However the Central Bank said last week that the credit to the private sector is expected to gradually increase with the easing of monetary conditions and rebound in economic activity.

On Thursday the CBSL announced a 250 basis points reduction in policy rates, the first downward revision in nearly three years.

Due to the economic contraction, half a million jobs were lost in industry and services and back-up lower-paying agricultural jobs could not compensate for income losses.

Combined with increases in the cost of living, this economic contraction led national and urban poverty to double (to 25 percent) and triple (to 15 percent), respectively. The crisis left 52 percent of the population in estate areas living in poverty, exacerbating spatial disparities, and led to an increase in overall inequality. 

Key downside risks include a slow debt restructuring process, limited external financing support, a sharper global slowdown, and a prolonged recovery from the scarring effects of the current crisis. A lower-level external trade equilibrium could have contagion effects on domestic trade, economic activity, jobs, and incomes.

This and adverse effects from revenue-mobilization efforts could worsen poverty projections. The financial sector needs to be managed carefully, given rising non-preforming loans and large public sector exposures.

The necessary macroeconomic adjustments may initially adversely affect growth and poverty but will correct overall imbalances, help regain access to international financial markets, and build the foundation for sustainable growth.

Mitigating the impacts on the poor and vulnerable remains critical during the adjustment. Reducing poverty requires better-targeted social assistance, an expansion of employment in industry and services, and a recovery in the real value of incomes. On the upside, the government’s reform program, supported by financing from international partners, could boost confidence and attract fresh capital inflows key to restart the labor market and restore livelihoods.

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