August 21, Colombo (LNW): For the first time since April 2020, Sri Lanka’s Net Foreign Assets (NFAs) in the banking sector have turned positive, reaching Rs. 636.3 billion in the first half of 2024 (1H24), as reported by the Central Bank of Sri Lanka (CBSL).
This improvement is primarily attributed to the accumulation of foreign assets, as outlined in the CBSL’s latest Monetary Policy report.
The report highlights that the NFAs of licensed commercial banks (LCBs) improved due to an increase in foreign assets, coupled with the settlement of foreign currency exposures to non-residents.
The Central Bank’s NFAs also experienced growth, primarily through net purchases of foreign exchange from the domestic market. This increase was bolstered by enhanced performance in the external sector, leading to an improvement in Sri Lanka’s gross official reserves.
In 2023, NFAs saw a significant positive shift of Rs. 1.3 trillion, a sharp contrast to the Rs. 785 billion contraction observed in 2022.
Additionally, credit extended to the private sector grew by approximately Rs. 146 billion during 1H24, marking a 6.2% year-on-year increase by the end of June 2024.
While much of this credit expansion was consumption-driven, there was also notable growth in credit provided to other sectors of the economy.
On the government front, net credit to the government (NCG) by the banking system contracted by Rs. 196 billion during 1H24.
This contraction was primarily due to a decrease in NCG by the Central Bank, driven by the maturity of treasury bills and a reduction in the use of the standing lending facility (SLF) by LCBs.
However, NCG by LCBs saw an increase, reflecting their growing investments in government securities.
Furthermore, credit extended to state-owned business enterprises (SOBEs) by LCBs contracted by Rs. 60.4 billion in 1H24. This reduction was largely due to net repayments by major SOBEs and the valuation impact of the rupee’s appreciation during this period.
Over the past two years, leading up to April 2024, Sri Lanka’s banking system has accumulated reserves or repaid debt amounting to 6.2 billion US dollars. This accumulation followed measures to curb inflationary pressures by halting money printing and preventing artificially low-interest rates.
In April 2022, Sri Lanka defaulted on its debt, ceasing repayments on bilateral and private loans. The savings from these deferred repayments, from April 2022 to March 2024, amount to 5.8 billion US dollars.
However, the Central Bank continued to borrow from the Reserve Bank of India and printed money to manage interventions, delaying a swift balance of payments correction.
Despite these challenges, the Central Bank has since adopted a deflationary policy, rebuilding reserves while private credit contracted. By April 2022, negative reserves had ballooned to 4.8 billion US dollars.
