ECONOMYNEXT – Sri Lanka’s private credit from commercial banks fell by 4.6 billion rupees in January 2025, after an extraordinary surge in December, official data showed, while credit to the government continued to expand.
Private credit outstanding fell to 8,151.4 billion rupees in January 2025, down from 8,156.0 billion rupees in December when private credit surged 193.2 billion rupees amid excess liquidity.
The banking system had high levels of excess liquidity in December and the rupee started to weaken. Imports also surged to 1.9 billion dollars.
Sri Lanka’s economy was strongly recovering under low inflation from broadly deflationary policy until the last quarter of 2024, when some shocks were delivered by injecting 100 billion rupees in excess liquidity.
Weakening currencies under the so-called ‘flexible exchange rate’ can lead to heightened uncertainty, panic driven import covering through credit as well as changes in net open positions of banks, all of which can worsen currency swings.
Unlike investment credit, credit taken to cover imports can reverse as stocks are sold by importers.
Credit to the government expanded by 83.2 billion rupees. Credit to state enterprises fell 8.7 billion rupees to 648 billion rupees in January 2025, after growing 48.7 billion rupees in December.
The Ceylon Electricity Board was ordered to cut tariffs by 20 percent in January 2025 by the regulator which can lead to credit swings or drawdowns of cash balances if the agency runs losses.
Under a fixed policy rate, SOE losses had led to money printing, currency depreciation, reserve losses and high inflation in the past.
All kinds of credit is blindly accommodated with new money under a single policy rate, leading to external instability which is then blamed on ‘imports’ or the ‘current account deficit’ by rejecting classical economics.
In January most of the domestic asset driven liquidity was withdrawn.
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Any increase in credit, accommodated by excess liquidity can lead to rise in domestic commodity prices, especially those which are non-traded. (Colombo/Mar10/2025)
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