ECONOMYNEXT – Sri Lanka’s private credit expanded 71 billion rupees in April 2025, easing from a 173 billion rupee surge in March, while credit to government expanded at a more moderate 57.2 billion rupees, official data show.
In the 12 months to April 2025 private credit was 1,124 billion rupees, up from 244 billion rupees in the year to April 2024.
Credit to state enterprises rose by 4.4 billion rupees in April, after rising 2.2 billion rupees in March.
In the year to April 2024 state and private credit was only 508 billion rupees.
Central bank credit contracted 35.8 billion rupees.
Net central bank credit may be seen as contracting if it comes from dollar purchases but if excess liquidity remains in the system, banks can lend the money as loans which will put pressure on the rupee lead to reserve losses.
The central bank has also injected money through swaps in recent months, further expanding reserve money and excess liquidity which may push up prices of non-traded items in particular like vegetables.
Central bank was a net buyer in forex markets in March by 160 million dollars, indicating that not all foreign exchange inflows were invested to generate imports at the interest rates then prevailing.
However, concerns have been that that reserve collections have stagnated in the past several months, especially after money was printed in the last quarter of 2024 as interbank rates picked up and later some reserve had to be given for imports to maintain exchange rate stability.
Maintaining exchange rate stability, and provide a foundation of a stable society and political system is the most simple of monetary regimes, but due the arbitrary changes in policy rates, rejecting economic principles lead to forex shortages and inability to repay debt.
Sri Lanka has exchange controls, showing that the operating framework of the central bank is fundamentally flawed and there are anchor conflicts.
When policy errors and anchor conflicts intensify, trade controls are also imposed.
Analysts have warned that Sri Lanka interest rates cannot decided by past inflation, or past growth trends, as had been done after the end of a civil war, serial currency crises, but by the need to collect reserves and repay debt.
Rates also cannot be cut on the basis that ‘fiscal policy is tight therefore monetary policy must be loose’ as in the past currency crises, as private credit will expand to cover the space given by better budgets.
However, if monetary stability and low inflation is maintained through deflationary policy, interest rates would collapse to developed nation levels over time.
Before the IMF Second Amendment to its articles in 1978 left Sri Lanka without a credible anchor for money, the country’s inflation and interest rates largely tracked that of the US. (Colombo/June15/2025)
