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Low Credit Growth Supporting 5%+ Economic Growth Puzzles IMF

IMF’s Mission Chief to Colombo Todd Schneider

By Paneetha Ameresekere

How may the economy be growing at over 5% when private sector credit growth has slowed down to the single digit level and while Sri Lanka is supposed to have had reached middle income status, a third of its population however were still living on food stamps, were questions that this reporter posed to an IMF delegation at a press conference in Colombo last week.
IMF’s Mission Chief to Colombo Todd Schneider in answer to these queries said that high economic growth may be due to a spillover effect over the previous year’s rapid credit growth.
He however said that low private sector credit growth complementing high economic growth was a source of puzzlement to the IMF.
Compilation of national statistics such as economic growth and inflation are now the sole prerogative of the government owned Census and Statistics Department (CSD). Previously, these statistics were also independently compiled by the Central Bank of Sri Lanka (CBSL).
But after the incumbent CBSL Governor Ajith Nivard Cabraal took over CBSL in 2006, it discontinued issuing such data, leaving that service to be solely in the hands of the CSD.
At a press conference held earlier this year, when the question of the veracity of CSD data cropped up, in that instance pertaining to inflation statistics, IMF’s Resident Representative in Colombo Dr Koshy Mathai in reply said that IMF is a one man operation in Sri Lanka. As such it doesn’t have the wherewithal to double check on the numbers given by CSD.
Therefore it accepts those figures as being correct. But in the case of fiscal numbers presented by the Finance Ministry, those numbers are cross checked with other finance numbers so as to ascertain their accuracy, Mathai had further said.
Mathai had also said that he had heard from other sources, expressing similar doubts in regard to the statistics thrown up by CSD.
According to available CBSL statistics, credit to the private sector in July, on a year on year (YoY) basis grew at a “low” 8.4% rate, compared to a speed nearly four times that number, ie at 31.6% YoY in July 2012.
CBSL envisages private sector credit growth, to more than double the 8.4% figure to grow between 17-18% to achieve an envisaged 7.5% growth for the year. However, the IMF has projected a lower growth figure of 6.5%.
IMF in a release said that given moderate credit growth, flat budget revenues and relatively low growth in non oil imports, it’s not yet clear whether the acceleration in economic growth will continue into the second half of the year.
This was in the context where according to CSD, the economy in the second quarter (2Q) of the year saw growth accelerate to 6.8% YoY compared to a 6.4% growth a year ago.
CSD further said that in the 1Q of the year growth slowed to 6% on a YoY basis compared to a 7.9% growth rate a year ago.
Last year CBSL placed a cap on private sector credit growth to 18% to contain a balance of payment crisis. That year the economy as a whole grew at a rate of 6.4%, slower than the 8.2% growth recorded in 2011, which was buttressed by private sector credit growth which grew at a rate of 34.5% YoY that year.
On the aspect of Sri Lanka moving up the ladder to be recognised as a middle income country, while on the other hand a third of its citizens were on food stamps (Samurdhi), Schneider in reply said that it may be due to skewed growth.
He further said that he was not qualified to talk on this subject because this was the first time that he had heard of such a thing.
On the aspect of how Sri Lanka should prepare itself when the Federal Reserve System would, sooner or later begin scaling down its quantitative easing programme, Schneider said that by fiscal consolidation and by adopting sound macroeconomic policies to win investor confidence, this problem could be circumvented.
On the question of whether further liberalisation of energy prices was needed, Schneider said that there was sufficient hydro electricity storage remaining and as such there was no necessity to revisit energy prices.
On debt, he said that it was high, with short term foreign debt (foreign investments in Treasuries) comprising 51% of total short term foreign debt.
Schneider further said that growth in inflation was modest.
Meanwhile the IMF release added that in the light of the risks facing Sri Lanka, particularly in relation to the exchange rate, policy rates should remain on hold.

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