CB may take act on high credit growth

By Shihar Aneez and Ranga Sirilal

Reuters: Sri Lanka may take action to cool down continuing high credit growth in the economy which has caused some concern, the island nation’s central bank governor said on Wednesday.

Central Bank Governor Ajith Nivard Cabraal also said the country will sell a $1 billion eurobond this year as Sri Lanka’s debut $500 million sovereign bond is maturing in 2012. He said the timing and tenure are not yet decided.

Private-sector credit growth has been at a 17-year high of more than 30 percent year-on-year since March and hit 33.5 percent in November, much higher than the central bank’s year-end estimate of 27 percent.

The island nation’s private sector credit has expanded by 32.5 percent in the first 11 months of 2011 year-on-year to 18.9 trillion rupees ($165.6 billion), the central bank data showed.

“We are concerned about high credit growth,” Cabraal told Reuters. “It was too high in the last quarter and in fact it took us for a surprise. We were expecting a slowdown due to the global and Asian slowdown.”

The central bank has kept policy rates low and steady for 11 months and has maintained a stable exchange rate by spending more than $2.6 billion of its reserves last year, despite a 3 percent devaluation by President Mahinda Rajapaksa on Nov. 20.

“We may consider actions if (credit) remains high and we have a number of tools including raising interest rates, imposing import margins, depreciating the rupee, and increasing taxes. But we don’t want to kill the growth momentum,” Cabraal said.

He declined to comment what will be the main tool he may use if continued high credit growth persist.

Treasury Secretary P.B. Jayasundera and many economists have said low interest rates and an overvalued rupee have resulted in cheap credit and imports, thus exerting pressure on the country’s balance-of-payments.

The International Monetary Fund (IMF) has long asked the central bank to allow flexibility in the rupee exchange rate, but Cabraal said the central bank will continue to defend the rupee despite reserve depletion. That is a major concern the IMF has raised during the $2.6 billion loan programme.

An IMF mission is in Sri Lanka reviewing progress under the programme, which comes as the central bank has said it will not draw the remaining $800 million in tranches due to the high interest cost.

“We have shared our plans with them. In the next monetary policy announcement, they will see some of the few new things that we are doing, designed in an overall balance that will create a new structural change for the economy,” Cabraal said without elaborating.

The next monetary policy announcement is due on Friday.