Sri Lanka’s credit to the private sector contracted by Rs. 52 billion in January 2024 with low demand for import credit and reduced private consumption as Value Added Tax(VAT) hike slowed down the economy.

According to Central Bank’s weekly indicators, the credit to the private sector contracted by Rs. 52.2 billion in January while net credit to the Government from the banking system increased by Rs. 50.1 billion.

Speaking to The Daily Morning Business, First Capital Chief Research and Strategy Officer, Dimantha Mathew, said that with the VAT rate spike in January a slowdown in the economy was expected including in private credit.

He said that in the last three months of 2023, the importers had imported in large volumes before the VAT hike, piling up stocks sufficient for the first three months of 2024. 

“Private consumption also contracted after the spike in the VAT,” he added.

He said that a gradual recovery in the economy is expected from April onwards with the increase in disposable income owing to the reduction in electricity and fuel prices, wage hikes, possible tax reductions and policy rate cuts by the Central Bank.

Private credit expanded by Rs. 267 billion in the second half (H2) of 2023 amidst falling interest rates after recording Rs. 102 billion private credit expansion in December (2023),

However, in the Credit Supply Survey for Q4 of 2023, the Central Bank said that demand for bank credit, mainly intended for operational purposes, is expected to increase in Q1 2024.

“Demand for loans is expected to increase at a significantly higher pace during 2024 Q1. 

The anticipated stabilisation of interest rates, recovery in key economic sectors and expansion of existing projects and new ventures by clients would favourably impact the demand for loans in the upcoming quarter,” the Central Bank said.

Moreover, it said that Non-Performing Loans(NPLs) are expected to increase during 2024 Q1 in all four sectors in line with high demand.