ECONOMYNEXT – Sri Lanka’s private credit has surged to a new record high of 246.1 billion rupees in October 2025, up from 236.3 billion rupees, a month earlier data from the central bank shows, while credit to government slowed.
So far this year, banks have given 1.61 trillion rupees to private business, up from 789.6 billion rupees.
Credit to government fell by 39 billion rupees in October 2025, after falling 165 billion a month earlier.
Net credit to the Sri Lanka government fell absolutely by 113.6 billion rupees over the year. There is however a complication with deposits of the government held in the banks while expensive long-term bonds continue to be sold.
Borrowings by state enterprises fell 21.9 billion rupees.
Sri Lanka’s central bank has missed its high flow inflation target of 5 percent, allowing budgets and state enterprise finances to improve as well as private the finances of private companies.
Analysts have urged the central bank not push up the cost of living by 5 percent a year, which has led to serial currency crises and default in the pats.
Sri Lanka has also been helped better US monetary policy involving gentle quantity tightening.
However in November Federal Reserve halted quantity tightening can also cut rates, despite elevated inflation by its own admission.
Meanwhile, the central bank continued to depreciate the currency through exchange rate policy involving selectively denying convertibility to private citizens, after over-purchasing dollars compared to its deflationary policy.
Analysts have described the selective denial of convertibility through exchange policy – despite current account surpluses being created as debt was allowed to be repaid amid delays in IMF and Asian Development Bank budget support loans – as the ‘Political Ravishment’ of the currency with a twist.
RELATED : Sri Lanka’s exchange rate depreciation by ‘Political Ravishment’
A depreciating currency may also drive credit as importers cover bills early and exporters hold back using credit lines and packing credit due to the confidence shock delivered though the flexible exchange rate.
Sri Lanka’s central bank has not been able to build reserve since the last quarter of 2024, when it started to monetize bank government securities holdings to operate a ‘floor system’ and abandoning a scarce reserve regime, people paying high taxes to improve government finances.
However there has been sufficient deflationary policy to repay central bank liabilities improving net foreign assets (and net international reserves) and also convertibility has been given to the government repay debt.
Deflationary policy is limited to coupons paid into the central bank for its re-structured step-down coupon bond portfolio, and some residual long term bonds which have been allowed to expire.
Analysts have warned that to collect more reserves less passive deflationary policy involving sell downs of the central bank’s portfolio or at least stripped coupons (which will be more marketable as deep discount bonds than step down bonds) will be needed to collect reserves.
In December there has been flood of budget support loan approvals to the Treasury.
In 2025, the central bank has not monetized bank Treasury bills to push down the overnight rate to the single policy rate of 7.75 percent. The interbank rate has edged up to 7.96 percent.
Though the central bank stopped monetizing bank treasury bill holdings through reverse repo auctions and shifted to a scarce reserve regime though the so-called single policy rate may be mis-signal rates and build up a credit imbalance, analysts have warned.
Depreciation also destroys capital, which has led to high nominal rates in the past.
Analysts also warned that abandoning a scarce reserve regime and shifting to a floor system (single policy rate) will lead to a quick sovereign default.
Rates further along the yield curve however has shifted up in recent months.
Though monetizing bank Treasury bill holdings have stopped, concerns have also been raised including by the parliament’s Committee on Public Enterprises about monetizing dollar deposits of commercial banks through inflationary buy-sell swaps.
RELATED : Sri Lanka central bank warned local fx swaps are a ‘hot money operation’ by COPF members
Any net injections through monetizing dollar deposits will also boost banks credit and imports and reduce the ability to build monetary reserves. (Colombo/Dec13/2025)
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