COLOMBO: Sri Lanka's central bank kept policy rates steady at multi-year lows on Wednesday for a fifth straight month as it expects lending to pick up in the second half of the year. The central bank also said it expects to achieve its target economic growth rate of 7.8 percent this year even amid sluggish imports and a contraction in private sector loans.
The repurchase rate and reverse repurchase rate were left at 6.50 percent and 8.00 percent, respectively, multi-year lows.
The broader market had expected rates to stay on hold, though some economists had hoped for a further rate cut to boost bank lending. Private sector credit in April contracted 3.3 percent from a year earlier, its worst performance since January 2010, and compared with 4.3 percent growth in March.
"I am sure the credit growth will reverse in the second half since we've addressed the reason for the fall," Central Bank Governor Ajith Nivard Cabraal told Reuters. "We expect to achieve the target of 7.8 percent growth this year."
The central bank last month approved a credit guarantee scheme on pawnbrokers' loans to counter the effect of the continued decline in pawning advances on productive sectors, the main reason for the fall in private credit growth.
Despite lower credit growth and imports, the $67 billion economy expanded 7.6 percent in the March quarter, which analysts attributed to strong government spending on massive infrastructure projects financed with external commercial funds.
Deputy central bank governor Nandalal Weerasinghe and some currency dealers attributed lower credit demand in April to the large number of holidays.
The central bank said in a statement commercial banks' deposit rates had fallen to expected levels, although lending rates in the market have still not adjusted in line with the decline in deposit rates.
"As a result of such slower-than-expected adjustment corporates have increasingly resorted to alternative sources of financing, such as corporate debt and equity issuances, suppliers' credit, and funds raised from abroad." The central bank said external trade continued to remain buoyant during April despite a modest decline in expenditure on imports, which resulted in a further contraction in the trade deficit.
Some banks and economists said that even with policy rates at multi-year lows, they did not see much demand for imports and borrowing for investments, as consumer spending is declining due to higher taxes and lower disposable income. Analysts said a lack of transparency in government contracts was also hindering overall business sentiment.
"Right or wrong, it is creating a belief that access to such contracts of the state are limited to selected people," Danushka Samarasinghe, the chief operating offer at Softlogic Stockbrokers, told Reuters.
"Further more, in starting up new business, the amount of red tape, bureaucracy, and number of taxes are strong deterrents to entrepreneurial flare."
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