ECONOMYNEXT – Sri Lanka’s private credit hit a new monthly high of 236.3 billion rupees in September 2025, up from the previous high of 226.8 billion rupees, taking total credit disbursed so far this year to 1,364 billion rupees.
The 12-mont private credit growth hit 22.1 percent in September 2025, up from 20.5 percent in August.
However, credit is growing from a low base.
Except for the last quarter of 2024, when aggressive inflationary open market operations were deployed to suppress rates and distort the workings of the interbank market, private credit has been financed with real deposits and not central bank credit.
In August 2025, banks reduced credit to government by 165.8 billion rupees, helping finance private credit while in September there was a further reduction of 39.9 billion rupees.
Amid high credit growth central bank reserve collections are down.
Analysts had warned that the belief that rates can be cut on statistics (recent historical inflation spanning 12-months), rejecting classical economics will lead to trouble and the interest rate structure has to be determined by the reserve collection needs as well.
Flexible inflation targeting coupled with potential output targeting had led to ‘Groundhog Day’ style currency crises after the end of a 30 – year civil war and eventual Latin America style peacetime sovereign default.
The most dangerous moment for the country comes when private credit recovers and the central bank cuts rates with inflationary policy, analysts had warned repeatedly.
The parliament could reduce the central bank’s inflation bias with a lower inflation target which should be a ceiling not a floor unlike now, analysts have said.
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Sri Lanka is not suffering forex shortages at the moment, due to marginal deflationary policy through interest coupons on the central bank’s bond stock, even though the rupee is depreciating largely due to excess liquidity from the over purchases of dollars.
There is also a scarce reserve regime in operation, which sharply reduces the risk of the next currency crisis and default from the single policy rate/abundant reserve regime.
However, even persistent lender of last resort borrowings through a scarce reserve window can temporarily pressure the rupee.
Any use of government excess borrowings (fiscal buffer) which were deposited in the central bank’s SDF window by state banks, which are then used to repay debt and to suppress rates, can also pressure the rupee (and trigger reserve losses), as can inflationary swaps, analysts have warned. (Colombo/Nov09/2025)
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