ECONOMYNEXT – Sri Lankas state brrowings from the banking system rose to 1,673 billion rupees in June 2015, up 21.5 percent from a year previously, with centralreserve bank credit soaring 30 percent to 186.7 billion rupees, official data show.

Credit to state business were up 38.2 percent to 482 billion rupees, from a year previously.

The state began borrowing heavily from the banking system after a budget deficit expanded with state salary hikes and misleading subsidies in January 2015, which was not followed up with a rate hike.

Rates were kept down with printed cash or Central Bank credit. Sri Lanka has a policy rate corridor, where over night rates should go to 7.5 percent when excess liquidity runs out, but market interest rate rises were obstructed with liquidity release and later straight-out Treasury expense purchases.

Central Bank credit, or printed cash soaring 30.8 percent to 186.7 billion rupees in June from a year previously.

Printed cash the most unsafe kind of credit, which triggers imbalances in the credit system and activates a balance of payments crises and inflation.

Experts state Central Bank credit to the banking system is downplayed throughout the existing balance of payments crises, due to accounting conventions.

Though big volumes of liquidity, partly decontaminated with borrowed securities under term redeemed offers were released to the banking system, they do not turn up as central bank credit to the state in the very same way offers involving straight-out transactions of federal government securities appear.

Credit to the personal sector was also up 20.1 percent to 2,722 billion rupees in June from a year earlier. Credit to personal sector was up 51 billion rupees from a month previously.

Though experts have actually been alerting about increasing private credit, though personal borrowers can not trigger any genuine damage as they are net savers. The damage originates from credit to state and SOEs, who are net spenders.

In the month of June itself, state loanings from the domestic banking system alleviated somewhat with a 650 million dollars sovereign bond.

With oil prices falling and good rains, analysts state energy SOEs must not be extremely cash negative. Cashflows of essential energy SOEs were typically positive in 2014. In June SOEs paid back 14.3 billion rupees. (Colombo/Sept07/2015 – Update II 0-corrected opening para. Sri Lankas state brrowings from the banking system increased to 1,673 billion rupees in June 2015, up 21.5 percent from a year earlier, with mainreserve bank credit skyrocketing 30 percent to 186.7 billion rupees, official data reveal.).