ECONOMYNEXT – Sri Lanka’s private credit expanded 133 billion rupees in May 2025, up from 71 billion in April, while commercial bank credit to government declined, official data show.
Private credit has expanded 478.6 billion rupees in the first five months of 2025, compared to only 71.5 billion rupees last year.
The central bank cut its policy rate last month, amid warnings that it was similar late cycle cuts that had been made after private credit recovered after post-war currency crises (which in turn were triggered by rate cuts), and it may hurt reserve collections.
Credit to government from banks fell 53 billion rupees in May.
Sri Lanka’s government has been taxing people at higher rates after the last currency crisis, and the central bank has kept the exchange rate stable, preventing the destruction of capital, which is key to reducing rates.
However, in past crises, banks have been discouraged from holding government bonds (from past deficits) when rates fell too low, and the central bank had bought them to control gilt yields from the open market or auctions, triggering currency crises.
An emblematic year was 2018, when taxes were hiked and fuel was market priced by then Finance Minister Mangala Samaraweera, who corrected the so-called 100 day excesses.
The 100-day fiscal excesses were accompanied by money printing, on claims that historical inflation was low and there was ‘space’ to cut rates, rejecting classical economic principles, triggering the 2015/2016 currency crisis.
There have been warning that even if money was not printed and rates were simply ‘signalled’ mis-directing banks, deposit raising and reserve collections will be compromised, despite no monetary instability (forex shortages) emerging.
Given the central bank’s 5 percent inflation target, which has triggered serial peacetime currency crises, there are risks in holding long bonds at low yields for any agency which is subject to mark-to-market rules.
Central bank credit to government also surged 123 billion rupees in May 2025, for reasons that are not clear.
The central bank credit number is a proxy for money printing.
However, the number can change due to valuation difference in the central bank’s securities portfolio and also net credit numbers from liquidity deposits. (Colombo/July06/2025)
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