Sri Lanka credit to state up 27-pct in August, printed money up 67-pct

CREDIT BUBBLE:  Sri Lanka's credit is surging in 2015 partly fired by printed money which is also keeping interest rates low.

ECONOMYNEXT - Sri Lanka credit to the government from commercial bank rose 27.4 percent in August 2015 from a year earlier with Central Bank credit (printed money) up 67 percent, official data showed as pressure mounted on the currency and foreign reserves.

Credit to the private sector rose 64.6 billion rupees to 3,068 billion rupees in August up, 21.3 percent from a year earlier.

Credit to state enterprises rose 6.7 billion rupees to 482.5 billion rupees, up 42 percent from a year earlier.

Since May however credit state enterprises have not grown.

Credit to the government from the banking system was stable at 1,735.6 billion rupees but Central Bank credit (printed money) rose by 25.6 billion rupees to 244.5 billion rupees.

The data indicates that some loans to bank had been repaid with printed money, which has the most de-stabilizing effect on the credit system, currency and the country's economy.

Central Bank credit, created by buying Treasury bills into with printed money generates excess demand in the economy, driving up imports. Unless foreign reserves are sold to 'redeem' the rupees in forex markets, the newly created money will force the currency to depreciate.

Central Bank credit was up 67.9 percent or 98 billion rupees in the year to August 2015.

Analysts say the official CB credit number understates the actual volume of excess demand generated by the Central Bank in the past year to generate balance of payments trouble and drive credit to unsustainable levels.

Due to the way data is accounted for liquidity releases by terminating term repo deals are not counted as CB credit, but they have exactly the same effect on credit, imports and the currency as outright monetization of debt.