By: Staff Writer
July 08, Colombo (LNW): Sri Lanka witnessed a significant surge in private sector credit in May 2025, as licensed commercial banks ramped up lending activity, while credit to the government from commercial banks saw a notable decline, according to the latest Central Bank data.
Private sector credit grew by Rs. 132.9 billion in May alone, up from Rs. 87.0 billion in April, signaling a renewed appetite for borrowing following a brief slowdown during the April festive period. In total, private sector credit rose by Rs. 494.5 billion during the first five months of 2025—compared to just Rs. 71.5 billion during the same period last year—marking a sharp acceleration in lending activity.
This robust expansion has pushed year-on-year private credit growth to 16.1 percent as of May, up from 15.2 percent in April, continuing a rising trend that began in late 2023 when the Central Bank commenced a monetary easing cycle. These favorable lending conditions emerged in mid-2023 as interest rates were slashed in response to falling inflation, allowing banks to extend more credit and businesses to access cheaper funds.
Further boosting confidence in the financial system were improvements in political stability and investor sentiment. The successful restructuring of Sri Lanka’s external debt and a clear electoral mandate in the Presidential and Parliamentary polls in 2024 reduced policy uncertainty. Consequently, the economy rebounded with a 5.0 percent GDP growth rate in 2024, followed by 4.8 percent growth in the first quarter of 2025—driven primarily by industrial activity.
The Central Bank also contributed to the momentum by cutting its benchmark policy rate by 25 basis points to 7.75 percent in May, aiming to drive lending rates further down and steer inflation toward the 5.0 percent medium-term target. Broad-based credit growth was evident across all economic sectors through March 2025.
However, the International Monetary Fund (IMF), in its recent fourth review of Sri Lanka’s economic reform program, warned of limited room for additional rate cuts, citing deflation primarily driven by supply-side improvements. The IMF also cautioned that external shocks could still necessitate further easing of monetary policy.
While private credit expanded, credit to the government from commercial banks dropped by Rs. 53 billion in May. Analysts view this as a healthy development, as it reduces the crowding-out effect on private sector borrowing. However, the Central Bank’s credit to the government unexpectedly jumped by Rs. 123 billion in the same month. This figure, often seen as a proxy for money printing, raised some concerns, although it may also reflect valuation changes in the Central Bank’s portfolio or liquidity adjustments.
Economists warn that excessive reliance on monetary tools such as rate cuts and indirect signaling, without transparency, risks undermining market confidence and reserve accumulation. They draw parallels to previous currency crises, particularly in 2018 and the 2015–2016 period, when similar monetary missteps—amid claims of “rate space” and denial of classical economic principles—triggered capital outflows and currency instability.
Despite tax hikes and improved fiscal controls post-crisis, Sri Lanka must remain vigilant. Analysts advise cautious management of long-term government securities, particularly under the Central Bank’s 5 percent inflation framework, to avoid re-triggering systemic financial risks.
