Credit growth towards productive sectors appears to remain inadequate: report

The Central Bank has stressed the need for financial system to actively lend to productive sectors at its meeting held on 03 March 2021.

Credit to productive sectors remains crucial in ensuring a sustained economic recovery, a Central Bank report said.

“Reflecting the transmission of monetary easing measures taken by the Central Bank in the recent past, both market deposit and lending rates have declined substantially towards establishing a single digit interest rate structure. Many market interest rates have declined to their historic lows. However, certain market interest rates, such as yields on government securities, have shown unwarranted volatility recently, which is not in line with monetary policy expectations. The Central Bank reiterates that the high level of excess liquidity in the money market and the reduction in policy interest rates thus far are intended to result in a stable low interest rate environment, while providing a positive real return to savers”, it said.

Some excerpts from above Central Bank report are reproduced below.

Reflecting the expansion in domestic credit, the growth of broad money (M2b) continued to accelerate. However, despite the substantial reduction in market lending rates, growth of credit towards productive sectors of the economy appears to remain inadequate. Going forward, the growth of credit to the private sector is expected to gather pace supported by low lending rates, the introduction of priority sector lending targets for banks on lending to the micro, small and medium scale enterprises (MSME) sector, and rising demand for credit driven by improving investor sentiments. Discussions with the banking community and other stakeholders are ongoing to rectify deficiencies in extending credit to productive, growth-supportive, sectors.

 The Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 4.50 per cent and 5.50 per cent, respectively.

The Board arrived at this decision after carefully considering the macroeconomic conditions and expected developments on the domestic and global fronts. The Board noted the recent slowdown in credit disbursements to the private sector and inadequate lending to productive sectors of the economy, and stressed the need for the financial system to actively lend to productive sectors in order to support the ongoing recovery of domestic production-based economic activity. Further, the Board observed the recent uptick in certain market interest rates, and reemphasised its commitment to continue the low interest rate structure until the economy shows signs of sustained revival, in the context of the low inflation environment.

The Sri Lankan economy is expected to make a notable recovery in 2021, supported by policy stimulus and improving business sentiments

Given the low inflation environment, the Central Bank is in the process of actively supporting the Government’s economic agenda focused on developing a production-based economy. Positive sentiments fuelled by the COVID-19 vaccination drive in the country and the impact of growth- promoting policies are expected to support the economic revival over the short to medium term.

The trade deficit contracted by US dollars 2.0 billion in 2020 benefiting from the notable decline in expenditure on imports, which more than compensated the decline in earnings from exports. The trade deficit is expected to remain compressed in 2021, supported by appropriate measures taken by the Government. Workers’ remittances continued to increase steadily from mid 2020, recording an annual increase of 5.8 per cent, and a further growth of 16.3 per cent in January 2021, from a year earlier. The tourism sector is expected to gradually recover in 2021 along with the rollout of vaccinations locally and globally. The exchange rate has recorded intermittent volatility, and the Central Bank has taken steps to dampen excessive speculation causing such volatility in the foreign exchange market. The Sri Lankan rupee has depreciated by 4.5 per cent against the US dollar thus far in 2021 following the 2.6 per cent depreciation in 2020. Gross official reserves were estimated at US dollars 4.8 billion, with an import cover of 3.7 months, at end January 2021. Discussions are continuing on securing foreign financing. Furthermore, increased non-debt creating foreign exchange inflows are expected, supported by the measures introduced by the Government.