By: Staff Writer
September 16, Colombo (LNW): Sri Lanka’s financial system appears steadier in the short run, but cracks are visible in the medium-term horizon, according to the Central Bank of Sri Lanka’s (CBSL) latest Systemic Risk Survey (SRS) for the second half of 2025. Conducted between late June and mid-July with input from 146 financial institutions, the survey found improved confidence over the next 12 months, but a dip in confidence for the three-year horizon, underscoring the fragile nature of the country’s recovery.
Respondents including banks, insurers, stockbrokers, and microfinance institutions—assessed the probability of a high-impact negative event as lower in the short term yet higher in the medium term. The shift reflects a domestic economy showing signs of revival while still tied to an unsettled global environment.
Global Headwinds
The CBSL highlighted “global macroeconomic risks” as a key concern, citing geopolitical tensions, high borrowing costs, and slowing global trade. Fitch Ratings recently projected global GDP growth to slow to 2.4% in 2025, from 2.9% in 2024. With US tariffs raising average effective rates to 16% and European growth stagnating, the external outlook for small, trade-dependent nations like Sri Lanka remains challenging.
China’s fiscal easing and currency depreciation support its exports, but weak domestic demand there limits the rebound in Asian trade. For Sri Lanka—whose recovery depends heavily on exports and worker remittances these dynamics could suppress growth.
Domestic Lending and Growth Dynamics
Domestically, credit conditions show a mixed picture. Private sector borrowings grew by Rs. 201.5 billion in July 2025, lifting total outstanding credit to over Rs. 9.5 trillion by mid-year. While this supports investment and consumption, the July increase was smaller than June’s Rs. 221.5 billion, suggesting momentum is uneven.
The CBSL’s Willingness to Lend Index rose in Q2 2025, extending a nine-quarter upward trend. Yet the index subsequently fell from 59.6 in Q2 to 41.4 in Q3, signalling banks’ growing caution despite favourable liquidity.
Signs of Stabilisation and Fragility
International lenders such as the IMF and World Bank expect Sri Lanka’s GDP growth to hover around 2–3% in 2025, a modest rebound following contraction in 2022 and fragile recovery in 2023-24. Inflation, which exceeded 70% at its 2022 peak, is projected to average below 8% in 2025, aided by tight monetary policy and stabilising food and fuel prices. Foreign reserves, replenished partly through IMF disbursements and debt restructuring progress, stand close to US$ 5–6 billion, offering short-term cover for imports and debt servicing.
Yet risks persist. The country remains heavily dependent on remittance inflows and tourism, both vulnerable to global shocks. Public debt ratios, while under renegotiation, still exceed 110% of GDP, leaving little room for fiscal manoeuvre.
The Road Ahead
The SRS paints a nuanced picture: short-term confidence in financial stability has improved, but doubts linger about resilience beyond 2025. As one Colombo-based economist observed, “We’ve moved from the edge of crisis to a fragile plateau. The danger is mistaking short-term calm for lasting stability.”
For Sri Lanka, the path to true economic stability lies in navigating external turbulence, sustaining reform momentum, and building buffers against future shocks. The CBSL’s warning is clear: while the immediate horizon may appear calmer, the medium-term risks cannot be ignored.
