Sri Lanka private sector credit shrinks as government borrows

June 22, 2009 (LBO) – Sri Lanka's private sector credit has shrunk for the fourth straight month, while government credit continues to rocket, amid falling revenues and rising expenses, the latest official data shows. In April 2009, credit to private sector from the banking system was down 3.2 percent to 1,247.8 billion rupees from December 2008, while credit to government zoomed 27 percent to 729 billion rupees, according to Central Bank data.

Private Slowdown

Credit to private sector was down 41 billion rupees on an absolute basis, while credit to government rose 157 billion rupees in the four months to April.

Up to March 2009, a part of the credit to government came from the central bank (printed money) which was a side effect of sterilization activities of the monetary authority, which was driving the balance of payments crisis.

But after the float of the rupee in late March, and the April peak in cash demand, money printing has ended and central bank credit to government is now falling as foreign reserves are collected.

The steep increase in state borrowings comes as government finances deteriorate. Revenues fell 8.2 percent in the first quarter.

But the central bank has cut