COLOMBO: Sri Lanka's central bank signalled its vigilance if credit growth continues beyond expected levels as borrowers take advantage of lower interest rates, and it revised down the economic growth forecast to 5.7 percent this year.
In its latest report on economic development posted it its website over the weekend, the central bank also emphasised a need to limit public sector borrowing to encourage private sector investment.
The central bank in April surprised markets with a 50 basis point cut to spur economic growth and boost consumer prices. Until then, it had held rates steady for 14 months.
However, annual private sector credit growth hit a near three-year high of 21.3 percent in August, compared with 21 percent a month earlier, picking up speed after remaining sluggish at the start of the year.
"The central bank is vigilant of the current trends in private sector credit and will adopt timely monetary policy measures in the event of continued excessive credit growth beyond the expected levels," the central bank said in the report. "... given the expected expansion in private sector credit during the ensuing period, there is a strong need for the public sector to restrict its borrowings to budgeted levels in order to avoid undue expansion in money and credit aggregates."
The economy is projected to grow by 5.7 percent in 2015, it said, adding that it will expand by around 6.5 percent in 2016, and over 7 percent thereafter due to new policy initiatives of the government along with the expansion in private sector investments.
Officials at the central bank had previously said the island nation's 2015 growth could be around 7 percent due to a slowdown in the construction sector after the government temporarily halted some infrastructure projects after corruption allegations.
Prime Minister Ranil Wickremesinghe said this month in the government would minimise tax holidays and levy more on rich people through direct taxes.
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