Recent monetary data point to a growing disconnect between liquidity conditions and credit flow to businesses, as private sector credit continues to weaken amid tightening financial conditions.
Although headline monetary aggregates show periods of expansion, lending to the private sector has struggled to gain traction, raising concerns about the sustainability of economic recovery and business expansion.
According to the latest Summary of Macroeconomic and Financial Data, nominal Private Sector Credit growth decelerated steadily through much of 2025, falling from double digit levels earlier in the year to weaker outcomes in the middle months.
Nominal Private Sector Credit growth fell from 29.4 percent in January 2025 to 19.9 percent by April, before dropping sharply to 9.7 percent in May and 8.6 percent in June. Although a mild recovery emerged later in the year, with credit growth improving to 19.2 percent by December, lending conditions remained far weaker than at the start of the period.
More troubling is the performance of real Private Sector Credit, which adjusts for inflation. Real credit growth slipped from 4.8 percent in January to 1.6 percent in March, before turning negative from April through July, bottoming at minus 7.3 percent in May. This prolonged contraction signals a severe erosion in the real value of credit available to businesses.
This trend suggests that while money supply indicators may signal liquidity growth, businesses are not fully benefiting from improved access to credit.
Tight Liquidity Conditions Constrain Lending
The weakness in private sector credit mirrors broader tightening in monetary conditions. Reserve Money growth, which surged strongly at the beginning of the period, moderated sharply as the year progressed. In some months, Reserve Money growth slowed to single digit levels, while other months recorded outright contraction.
Bank reserves, a critical component of liquidity available for lending, also experienced volatility. Periods of decline in banks’ reserves limited their capacity to extend credit, particularly to small and medium sized enterprises that are more sensitive to shifts in liquidity.
According to the data, reserve Money growth surged to 74.2 percent in January 2025, but this expansion proved short lived. By April, growth had slowed sharply to 38.0 percent, and by June it had collapsed to just 2.0 percent.
The second half of the year saw Reserve Money fluctuate unevenly, including a contraction of minus 6.4 percent in September and minus 1.6 percent in November, before rebounding to 12.5 percent in December. Such volatility in Reserve Money constrained banks’ ability to plan and extend consistent credit to the private sector.
Banks’ reserves also mirrored this instability. The contribution of banks’ reserves to Reserve Money growth declined from 39.5 percent in January to negative territory in several months, including minus 11.0 percent in June and minus 26.7 percent in September, limiting liquidity available for lending.
Although Broad Money growth remained positive, its pace was uneven, suggesting that liquidity was circulating within the financial system without translating into strong lending to productive sectors of the economy.
Rising Cost of Credit and Risk Aversion
Beyond liquidity conditions, the cost of borrowing remains a major constraint on private sector credit growth. Elevated interest rates, reflecting tight monetary policy and inflation risks, have reduced appetite for new borrowing. Many businesses have opted to delay expansion plans, scale back investment, or rely on internal financing rather than take on expensive bank credit.
Banks, on their part, have adopted a more cautious lending posture. Credit risk assessments have tightened, with lenders prioritizing asset quality over balance sheet expansion. This has disproportionately affected sectors such as manufacturing, trade, and construction, which typically rely on bank financing to support working capital and capital expenditure.
The combination of high borrowing costs and heightened risk aversion has created a credit environment that remains restrictive despite signs of monetary expansion.
Real Credit Growth Signals Deeper Challenges
The trajectory of real Private Sector Credit is particularly concerning. Data show that real credit growth turned negative for several consecutive months, underscoring the erosion of purchasing power and the impact of inflation on borrowing capacity.
Even as nominal credit figures improved marginally toward the end of the period, real credit growth only recovered modestly, suggesting that inflation continues to dilute the effectiveness of credit expansion. For businesses, this means that even when loans are available, their real value is often insufficient to support meaningful growth or productivity gains.
This dynamic poses a risk to broader economic performance, as private sector investment is a key driver of output, employment, and innovation.
Implications for Economic Growth
Weak private sector credit has direct implications for economic growth. Businesses facing constrained access to finance are less likely to invest in new equipment, expand operations, or hire additional workers. Over time, this can dampen output growth and slow job creation.
Small and medium sized enterprises are particularly vulnerable. These firms account for a significant share of employment and value creation, yet they often lack alternative financing options outside the banking sector. Persistent credit weakness could therefore widen existing gaps in economic inclusion and slow the pace of recovery across key sectors.
Moreover, subdued credit growth may undermine policy efforts aimed at stimulating domestic production and reducing reliance on imports.
Policy Signals and the Way Forward
The weakening of private sector credit underscores the delicate balance facing monetary authorities. While efforts to maintain price stability and manage liquidity risks remain essential, prolonged tight conditions could stifle credit growth and weaken economic momentum.
Going forward, a gradual easing of financial conditions, if supported by declining inflation and improved macroeconomic stability, could help revive lending to the private sector. Complementary measures such as targeted credit schemes, risk sharing mechanisms, and reforms to strengthen credit infrastructure may also be needed to restore confidence among lenders and borrowers.
Ultimately, sustaining economic growth will depend not only on headline liquidity indicators but on the effective transmission of monetary conditions into real sector financing.
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