Sri Lanka’s central bank has approved 58 billion rupees of subsidized credit from re-finance (printed money), for Coronavirus affected businesses while import controls have been extended indefinitely.
The central bank has it will re-finance up to 150 billion rupees of loans with printed money, which could result in forex reserve losses of up to 800 million US dollars once private credit picks up or the money is re-used in the banking system to buy bonds and pay salaries to state workers.
The banking system already has excess liquidity of about 170 billion rupees (900 million US dollars).
Over the last week the central bank has allowed some cash injected through term reverse repo deals and excess liquidity had come down from over 200 billion rupees.
Private credit was weak in April 2020.
The central bank is printing money for banks at 1 percent to give the loans at 4 percent.
At the moment the official policy rate is 6.5 percent and excess liquidity parked at the central bank is paid 5.50 percent, resulting in a 4.5 percent loss for the central bank until the money ends up in forex markets and are mopped by foreign reserve losses.
Sri Lanka is under strict ‘Nixon shock’ style import controls not seen since to reduce reserve losses.
The central bank said 20,240 business have been approved loans as of July 02 totalling 52 billion rupees.
Under first phase which ended on April 01, 13,926 loans of 28 billion rupees was approved and banks had already disbursed 21 billion rupees to 10,270 businesses by July 02.
In a second phase started in June 19, 2020, the Central Bank approved 6,314 loans amounting totally 25 billion rupees to 6,314 businesses and individuals.
Out of the 53 billion rupees of loans approved so far 45 percent had gone to to businesses in the services sector led by trade services, 38 percent to industr and 17 percent for agriculture.
Under the third phase which will go up to 150 billion rupees, which starts from July 01, the central bank will give a credit guarantee.
“Accordingly, the Central Bank will share a major portion of credit risk of end borrowers, while providing an interest subsidy of 5 percent per annum to banks to cover their cost of funds,” the central bank said.
“The credit guarantee provided by the Central Bank ranges from 80 percent for the smaller loans to 50 percent for relatively larger loans.”