Sri Lanka’s domestic financial landscape is showing another important sign of change, as foreign investors increase their holdings of Government securities while private-sector borrowing expands and the Central Bank continues to stay away from new monetary financing.
Foreign holdings of Sri Lankan local Government securities climbed to approximately Rs.210.6 billion by early September 2026, compared with around Rs.176.5 billion in mid-July.
That represents an increase of roughly 19% in seven weeks.
The upward movement was already visible by late August, when foreign holdings reached Rs.192.86 billion, extending a steady recovery in foreign participation in the domestic Government securities market.
The development is significant because Sri Lanka’s financial system is simultaneously experiencing strong private-sector credit expansion. Private credit increased by Rs.169 billion during July, representing a 26.4% year-on-year expansion, while State-sector credit contracted by Rs.189.6 billion.
Together, these movements suggest that the domestic financial system is being reshaped from the extraordinary conditions that followed the country’s debt crisis.
Another important element is the position of the Central Bank of Sri Lanka.
CBSL holdings of Government securities declined marginally during the first half of 2026, from Rs.2,508.9 billion at end-2025 to Rs.2,498.1 billion at end-June. The reduction was attributed to Treasury bond maturities.
The Central Bank has stressed that these holdings represent the restructuring of its previous lending to the Government. Crucially, it has stated that it has not acquired new Government securities since January 2024 and therefore has not undertaken permanent liquidity injections through the creation of domestic assets during that period.
This represents an important distinction from the monetary financing practices that had previously created serious macroeconomic pressures.
At the same time, Treasury yields have been moving lower, particularly at the short end. Three-month Treasury-bill yields declined by 100 basis points between March and August, from 10.05% to 9.05%. Longer-term yields, however, declined by only 15–20 basis points.
The resulting flattening of the yield curve could have implications for both Government financing costs and the allocation of capital within the banking system.
The Government has indicated that it intends to remain heavily dependent on domestic financing. Finance Minister Anil Jayantha Fernando said in Parliament that 85–90% of annual gross borrowing requirements would be financed domestically through Treasury bonds and bills, with foreign commercial borrowing to be limited by 2030.
That strategy creates a critical policy challenge.
As Government financing remains concentrated in the domestic market, policymakers must ensure that the State’s borrowing requirements do not absorb the liquidity and lending capacity increasingly becoming available to the private sector.
The surge in foreign holdings provides an additional dimension. Greater foreign participation can broaden the investor base for Government securities, but foreign portfolio flows can also be sensitive to global interest rates, exchange-rate expectations and domestic economic conditions.
Sri Lanka’s emerging credit landscape is therefore being shaped by three simultaneous developments: stronger private-sector borrowing, declining Central Bank Government-security holdings and renewed foreign participation in Treasury securities.
Whether these changes translate into durable economic stability will depend on how effectively Sri Lanka converts expanding credit and capital-market access into productive investment, while maintaining fiscal and monetary discipline.