The Central Bank (CB) last week accused the commercial banks of not yet having sufficiently responded to the various efforts it had taken to enhance liquidity in the financial markets.

The CB noted that the rate of growth in credit to the private sector has declined sharply to 6.4% in January this year from 7.9% at the end of 2008 and requested the commercial banks to immediately enhance lending activities so that credit to the private sector is ensured and economic activities in the country are supported, "thereby arresting any adverse consequences on the economy."

The bank said in a statement that there had been a sharp decline in inflation and inflation expectations enabling it to commence relaxing its monetary policy stance and taken several measures to enhance liquidity in the market.

Among the measures listed was gradual reduction of the penal rate of interest imposed on reverse re-purchase transactions from an initial 19% to 14.75%. Additionally the re-purchase and reverse re-purchase rates have been reduced by 25 basis points each and the re-purchase rate now stood at 10.25% and the reverse re-purchase rate at 11.75%.

The statutory reserve ratio applicable to rupee deposit liabilities of commercial banks has been reduced by a total of 300 basis points to 7% by January 2009 in order to inject fresh liquidity into the market, the CB said.

It said that it had further addressed liquidity shortfalls that commercial banks faced at any time by releasing liquidity through open market operations conducted on daily, term and permanent bases and claimed that this "careful relaxation" of the CB’s monetary stance through these measures had resulted in the call market, Treasury Bill and Bond rates falling.

The average call market rate currently ran at around 12% against 17% to 19% prior to the relaxation of monetary policy, the bank noted. Also, the yield rates on Treasury Bills and Bonds had declined in a range of 170 to 240 basis points since the end of last year.

These measures were intended to have a significant impact on all interest rates in the country so that the growth in the private sector credit is maintained at a desirable rate which is compatible with the medium term growth and inflation path, the CB said.

Analysts however made the point that the government has been appropriating much of the available credit with official data indicating that total credit outstanding to the private sector had fallen in absolute terms in January to Rs.1,264.2 billion from Rs.1,278.5 billion in December.

On the other hand, credit to government, including from the CB, had risen to Rs.625.7 billion in January from Rs.572 billion in December last year with commercial banks credit alone to the government rising to Rs.270 billion from Rs.243.6 billion the previous month.

Rising defence expenditure was one of the reasons for the expansion of credit to government, they said.

Deputy Finance Minister Sarath Amunugama said on Friday that about 100 public sector institutions were asking the Treasury for money at the end of every month instead of generating their own revenues.