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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. The banking sector debt increased by 62.5 percent to Rs. 8,525.7 billion at the end of 2022 from Rs. 5,247.9 billion in 2021 due to the increased debt to commercial banks and the Central Bank. Meanwhile, nonbank sector debt also increased by 27.8 percent to Rs. 6,164.1 billion at the end of 2022 compared to Rs.4,822.1 billion at the end of 2021. Of the total domestic debt, the share of the banking sector debt increased to 56.7 percent by the end of 2022 from 47.3 percent at the end of 2021 whereas the share of the non-banking sector debt declined to 41.0 percent by the end of 2022 from 43.5 percent by the end 2021. The medium and long term domestic debt stock increased by 24.2 percent to Rs. 9,882.1 billion by the end of 2022 from Rs. 7,957.4 billion recorded at the end of 2021. However,the share of medium and long term debt in the total domestic debt stock further declined to 65.7 percent in 2022 from 71.7 percent at the end of 2021 due to the continued dependency on short term instruments for deficit financing in 2022 than medium and long term financing. The share of Treasury Bonds of the total outstanding domestic debt stock declined to 57.9 percent at the end of 2022 from 62.8 percent at the end of 2021. 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.

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