By:Staff WriterColombo (LNW): Sri Lanka’s private sector credit growth has been on the decline due to expectations of market interest rates falling, Central Bank report revealed.
It has come down to Rs 7,094.5 billion in June comparing to Rs.7714.2 billion in the same month last year, latest CB statistics shows.
Despite reduction in the central bank’s key policy rates and this month’s Commercial Bank’s Statutory Reserve Ratio (SRR), the private sector credit growth has still been on the decline.
The last available official data showed the year-on-year private sector credit growth contracted 8 percent in June following a 9.5 percent contraction in the previous month.
“The month-to-month changes are difficult to explain. Probably when the interest rates are coming down, still the expectation is that the rates are to come down further,” CB Governor Weerasinghe said.
The central bank held the key policy rates steady while announcing some reduction for the rate on pawning facilities, pre-arranged temporary overdrafts, credit cards, and penal interest rates to push the market interest rates down.
The central bank changed its tight monetary policy stance to an easing from June this year, aiming to spur a faltering economy with contraction. The central bank has estimated a 2 percent contraction this year.
The island nation has mostly seen contractions on a quarterly basis since it declared sovereign debt default in April 2022.
Though the central bank has reduced its monetary policy rates, the market lending rates are still high, analysts say. The central bank’s latest move to reduce some rates including on credit cards and pawning come as an effort to slash the market lending rates and boost the private sector credit.
“There may not be a significant demand for credit yet. When the expectation is for interest rates to come down further… the businesses would not start borrowing more and it’s only repricing the old loans into new loans that’s what is happening,” Weerasinghe said.
“It is too early for us to see the trend but (we) can see the decline of credit has probably turned around.
We will have to wait and see what the next month’s credit is. I think because of the expectations of interest rates coming down further, we may not see a significant expansion in private sector credit, he pointed out.