By: Isuru Parakrama
October 14, Colombo (LNW): The Central Bank of Sri Lanka (CBSL) has reported encouraging signs of economic recovery, noting a steady reduction in domestic macro-financial risks.
Whilst challenges remain, the gradual restoration of financial stability is being facilitated by the country’s declining inflation, lower interest rates, and strengthened currency, creating a more favourable business environment.
The Central Bank attributes much of this improvement to its accommodative monetary policy, which has helped correct interest rate anomalies and reinvigorate credit growth.
The reduction in risk premiums and enhanced credit availability, particularly for the private sector, have bolstered the economic recovery.
Additionally, a shift in financial exposure away from the public sector and towards the private sector indicates better resource allocation, further supporting this progress.
Sri Lanka’s fiscal performance in 2024 has exceeded expectations, despite the significant challenges it continues to face. Key fiscal balances have improved due to robust revenue-based consolidation efforts.
The successful Domestic Debt Optimisation (DDO) process completed in 2023 and the forthcoming External Debt Restructuring (EDR) finalisation in 2024 are expected to reduce uncertainty and restore confidence among investors.
The stock market also reflects these positive trends, with the All Share Price Index showing a year-to-date increase after a period of uncertainty linked to the ongoing election cycle.
Financial institutions have demonstrated resilience during the first half of 2024, with banking sector indicators, such as credit quality, liquidity, and capital adequacy, showing marked improvements.
Bank profitability has been significantly boosted by an increase in net interest incomes, although the non-performing loan (NPL) ratio remains a concern.
The improved provision coverage ratio indicates banks are better prepared to manage potential risks.
Amid falling interest rates and a gradual resurgence in domestic demand, the banking sector has witnessed renewed credit growth, particularly within the private sector.
Meanwhile, the state-owned enterprises’ (SOE) reliance on banking sector credit has decreased, largely due to the Central Government’s intervention in absorbing certain SOE credit facilities.
However, despite these positive trends, lingering effects from previous economic challenges, such as elevated price levels, reduced real income, and rigid labour market conditions, continue to pose obstacles to sustained macroeconomic and financial stability.
Looking ahead, the Central Bank anticipates that the financial system will continue to improve, with asset quality expected to strengthen and capital buffers to grow.
The CB urges careful risk management as the economy stabilises further and moves towards long-term recovery, despite the ongoing challenges posed by both domestic and global factors.
