Credit growth to slow to 27% by December – Cabraal

Reuters: Sri Lanka’s private sector credit growth will decline to 27 per cent year-on-year compared to a 16-year high of 34.4 per cent in June this year, due to a higher base and a slowing global economy, the Central Bank said on Tuesday.

Credit growth had eased to 34 per cent year-on-year in July from a 16-year high of 34.4 per cent a month ago, the Central Bank’s latest data showed.

Economists have warned that more-than-expected private sector credit growth could add inflationary pressure through the demand side as the Central Bank has kept monetary policy rates at six-year lows since January.

“It should probably be around 27 per cent we will end up with, according to our own estimate,” Central Bank Governor Ajith Nivard Cabraal told Reuters in a telephone interview.

Cabraal said the tapering-off effect was mainly due to a higher base in the second half of the last year, after a low base effect caused by a surge in lending after the end of a 25-year civil war in May 2009.

“Towards the end of the year, it will come down to a normal figure what we have targeted and also it will be fairly moderated to some extent because the worldwide situation is challenging as well,” he said.

“We think it will be just right and it will not have a pressure on inflation.”

The IMF on 7 September said sustained rapid credit growth bears close monitoring and may need to be slowed in order to prevent future inflationary pressure.

Cabraal also said the country could still achieve an ambitious record economic growth target of 8.5 per cent this year, despite the first two quarters’ performance coming in under estimates.

“There is a chance that it will be revised upward, but we have not done that as yet,” Cabraal said.

“We will probably keep the full-year growth target as it is and watch the next one as well,” Cabraal said referring to the third quarter performance. “Right now it seems to be on par with what we had said.”

Sri Lanka’s $ 50 billion economy expanded by 8.2 per cent in the second quarter, after a 7.9 per cent growth in the first quarter.

The Central Bank has estimated the full-year growth to be at a record high of 8.5 per cent, up from the last year’s 32-year high growth of eight per cent due to increased post-war economic activities with expected high foreign investments.

The International Monetary Fund has estimated the growth to be around 7.5 per cent this year.