‘Dip in government’s borrowings from banks becoming a blessing for private sector’

by Sanath Nanayakkare

The dip in government borrowings following the completion of the Domestic Debt Optimization (DDO) will become an impetus for private sector credit growth in time to come, Central Bank Governor, Dr. Nandalal Weerasinghe said in Colombo recently.

The Governor made this remark last Friday while delivering the keynote speech at the Chartered Financial Analysts (CFA) Society Sri Lanka CEO Forum.

“It is expected that government borrowings will reduce in the medium term, and if you compare with the past, the government has been absorbing a lot of domestic resources for servicing its debt. As a result of it, there was a crowding out impact on the private sector in accessing to bank credit. Going forward, with the completion of the DDO programme, we think that there will be a lot more domestic resources out of the banking system available for the private sector on a medium to long term sustainable basis,” he noted.

The Governor pointed out that it would facilitate and provide more opportunities for the private sector to have greater access to bank credit and grow faster and contribute to the real economic growth based on private investment.

“That is what is really important at this juncture. So far we have been mainly relying on public investments-driven growth. We have to change that model. When the demand by the public sector reduces for bank funding; those savings and resources will be available to the private sector. The monetary policy actions also enable the cost of borrowing to be reduced. Meanwhile, the government will be demanding less credit from the banking system after the debt exchange programme is concluded. Remember, that the envisaged debt exchange programme will result in no payment of treasury bonds by the government for almost five years plus extended treasury bills by the Central Bank. This means no repayment of the principle and only interest payments will be serviced by the government. So, when the government requires less credit from the banking system, there will be a lot of funds available in the banking system for the private sector to tap,” he said.