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Sri Lanka policy rates unchanged, private credit low

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Director - Equity Analytics
Director - Equity Analytics

Nov 16, 2012 (LBO) - Sri Lanka's central bank kept the rate at which money is injected into the market at unchanged at 9.76 percent at its November monetary policy meeting, though money has been injected at below market rates on longer tenures from time to time.

The central bank said in September new credit to private businesses from banks was less than 10 billion rupees compared to around 55 billion rupees in February and March.

"Net credit to the government and credit to public corporations also increased modestly in September, but on a cumulative basis credit obtained by the public sector was higher than the projected levels," the Central Banks said.

"As such, the Government’s commitment to continued fiscal consolidation, as expressed in the 2013 Budget speech, is likely to provide comfort to the conduct of monetary policy in the years ahead."

Though overnight policy rates had been held steady, monetary policy has loosened over the past two month with several term auctions at below market rates.

On November 08, the Central Bank injected 9.0 billion rupees in 31 day money at 9.87 percent, below the market repo rate of around 11.00/11.50 percent.

Another auction this week was cancelled, but the Central Bank's Treasury bill stock anyway went up to 215 billion rupees on November 16, with a further 4.4 billion rupees in excess liquidity.

Sri Lanka's rupee peg has been volatile in recent weeks. Before the term auctions began in the first week of October small outright sales of central bank held Treasury bills helped stabilize the currency peg and build up foreign reserves lost during a balance of payments crisis.

The Central Bank said by end September higher inflows from remittances, capital inflows helped create a surplus of 269 million US dollars in the balance of payments by end September 2012 and reserves were at 7.1 billion US dollars.

Sri Lanka has suffered balance of payment crises and high inflation every since a central bank with an unstable peg was created in 1951 abolishing a currency board that had kept the economy stable from the previous century

From mid 2011, the central bank pushed credit and imports to unsustainable levels through Treasury bill purchases to sterilize foreign exchange sales and suppress rates, indirectly accommodating a spike in state credit to manipulate oil prices.

In February 2012 rates and energy prices were raised. The rupee was also allowed to fall ending contradictory exchange and monetary policy.

Sri Lanka's trade deficit contracted 0.3 percent up to September 2012 from a year earlier, with imports declining 3.3 percent and exports falling 5.8 percent, the Central Bank said.

Falling exports can reduce imports as incomes shrink. Settling old debt including oil bills, reduced capital inflows, or selling central bank held Treasury bills can reduce imports.

Delaying oil bill settlements (which is similar to getting foreign borrowings) or spending large volumes of foreign borrowings can increase imports.

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