Sri Lankan rupee depreciation swells private credit in March

The sharp fall in the value of the Sri Lankan rupee helped swell the amount of the country's outstanding loans and advances to the private sector in March, according to Central Bank data. 

This gave a sudden boost to the private credit numbers, which otherwise had been anaemic and lacklustre, as the banks grew skittish over the deteriorating economic conditions and their consequences on their borrowers' solvency and thereby the asset quality, Daily Mirror reported. 

The latest private sector credit growth numbers published by the Sri Lankan Central Bank for March showed that the licensed commercial banks' outstanding private sector credit growth had swollen by an unprecedented Rs478.0 billion, marking the biggest expansion in private credit in a single month. 

"The sharp depreciation of the Sri Lankan rupee in March 2022 remains the key reason for the augmentation of monetary and credit aggregates terms in March 2022," the Central Bank said explaining the underlying reason for the sharp ascent.

The rupee shed 80% of its value through 13 May, from 7 March, when the then Governor Ajith Nivard Cabraal botched the rupee float, which earned the rupee the dubious reputation as the world's worst-performing currency.  

The March anomaly in private credit numbers, caused by the sharp fall in the value of the rupee, concealed the true trajectory of credit in the economy, as the banks expanded their private loan books by a more modest Rs36 billion and Rs34 billion in fresh credit in January and February, respectively. 

In fact, this condition was mirrored in the balance sheets of the licensed commercial banks coming out for the January-March quarter, which showed a sudden spike in the asset base, almost entirely due to the revaluation impact. 

For instance, Commercial Bank of Ceylon PLC, the largest private sector lender in the country, which filed its interim results for the quarter ended on March 31, 2022, showed its assets had grown by a robust 15% or Rs280 billion, mostly on account of the rupee devaluation. 

Besides the anomalous private credit, public credit too had the same effect, as the net credit to the government and outstanding credit to the public corporations surged by Rs449.4 billion and Rs310.3 billion, respectively in March. 

This also reflects the extent to which the country's public debt stock could be revalued at and thereby sending the country's indebtedness to further unsustainable levels, just from the rupee depreciation shock, with all else remaining unchanged.

This is another reason why a section of the economists made a case on why Sri Lanka mustn't depreciate its currency.