By: Staff Writer
May 05, Colombo (LNW): Despite a significant rebound in private sector credit, Sri Lanka’s fiscal pressures remain a concern as the country’s banking and finance sectors closed 2024 on a high note. The Central Bank of Sri Lanka’s Annual Economic Review 2024 reveals that private lending across licensed financial institutions surged by over Rs.1 trillion, driven by falling interest rates and a cautiously recovering economy.
According to the report, licensed commercial banks led the way with a Rs.789.6 billion increase in private sector credit—marking a 10.7% year-on-year growth. Licensed finance companies posted a striking 21.0% rise, adding Rs.277.1 billion to the credit flow, largely fueled by consumer demand for gold-backed loans, personal financing, and vehicle leasing. Licensed specialized banks, while growing at a slower pace, still registered a Rs.27.9 billion or 2.5% increase in loans.
This reversal from the credit stagnation seen in 2023 reflects improved liquidity and a reduction in market interest rates. However, analysts caution that the credit surge, while indicative of short-term economic recovery, does not fully address deeper fiscal vulnerabilities—including high public debt, revenue shortfalls, and the structural reforms demanded by international creditors.
The growth in credit was broadly distributed across key economic sectors. Lending to industry, which represents nearly 40% of private sector credit from commercial banks, rose by 8.4%, driven by increased financing to construction, textiles, chemicals, and transport equipment. The construction sector alone saw a 5.5% credit rise, signaling a tentative rebound after years of decline.
The services sector, accounting for 27.4% of credit, expanded by 12.3%. Retail and wholesale trade, IT and communication, logistics, and business services were among the primary beneficiaries. Agriculture, though a smaller credit recipient at 7.3%, recorded a healthy 8.2% loan increase, supported by favorable weather and improved rural market integration. Notably, credit flowed into food crops, fisheries, and paddy cultivation, aligning with national efforts to strengthen food security and reduce import dependence.
Despite this growth, concerns persist about the long-term sustainability of credit-fueled expansion in the absence of robust fiscal consolidation. The Central Bank noted that short- to medium-term loans outpaced long-term borrowing—raising questions about investment in infrastructure and capital formation necessary for sustained development.
While the lending uptick paints a picture of resilience, policymakers are reminded that without parallel progress in tax reforms, debt restructuring, and governance improvements, Sri Lanka’s fiscal outlook will remain fragile—even amid signs of credit and consumption revival.
