Credit Shift became a notable feature of Sri Lanka’s financial landscape in July 2026, as private-sector credit expanded by Rs 169.0 billion while credit to the state sector contracted by Rs 189.6 billion during the month.
Credit Shift highlights stronger private lending and changing government financing trends.
The figures, highlighted in First Capital Research’s September monthly economic report, point to a significant change in the distribution of domestic credit, alongside evolving conditions in the Treasury market and rising foreign participation in local government securities.
Private-sector credit increased by 1.5% month-on-month in July, taking the year-on-year growth rate to 26.4%. On a year-to-date basis, private credit had expanded by 12.1%, underscoring the continued recovery in lending to businesses and other private-sector borrowers.
At the same time, credit extended to the public sector declined by Rs 189.6 billion during July. The contrasting movements resulted in a pronounced Credit Shift between private and state-sector borrowing, highlighting changing financing patterns within the domestic financial system.
The increase in private sector credit comes against a backdrop of improving domestic economic activity and changing market conditions. Stronger lending can provide businesses with additional working capital and financing for investment, although the pace and composition of credit growth remain important factors for financial and economic stability.
Developments in the government securities market have also been significant. First Capital Research noted that three-month Treasury bill yields declined by 100 basis points between March and August 2026, falling from 10.05% to 9.05%. By comparison, yields at the longer end of the curve declined by around 15 to 20 basis points over the same period.
The differing pace of yield movements resulted in a notable flattening of the government securities yield curve. The change indicates that short-term borrowing costs had fallen considerably faster than longer-term yields during the period.
The secondary Treasury market began August on relatively stable footing, with modest buying interest contributing to a marginal decline in yields, according to the report. During the third week of the month, buying interest at the longer end pushed yields down by approximately 10 to 15 basis points, while the remainder of the curve remained broadly unchanged.
The direction of the Treasury market is particularly relevant as the government continues to rely heavily on domestic financing. Finance Minister Anil Jayantha Fernando told Parliament in August that the Government plans to meet around 85% to 90% of its annual gross borrowing requirements through domestic sources, including Treasury bonds and Treasury bills, while seeking to limit foreign commercial borrowing by 2030.
This financing strategy places greater importance on the depth and stability of the domestic government securities market. Changes in investor demand, liquidity conditions and yields can therefore influence the cost and availability of government financing.
Meanwhile, Central Bank of Sri Lanka data showed that the Central Bank’s holdings of government securities declined marginally during the first half of 2026. Holdings stood at Rs 2,498.1 billion at the end of June, compared with Rs 2,508.9 billion at the end of 2025.
The decline was attributed to Treasury bond maturities. The CBSL has also stated that the holdings reflect the restructuring of its past lending to the Government and that it has not acquired new government securities since January 2024. Consequently, no permanent liquidity injections through the creation of domestic assets have been undertaken through such purchases during this period.
Another notable development has been the increase in foreign holdings of government securities. Foreign holdings of local government securities reached Rs 210.6 billion by early September, up from approximately Rs 176.5 billion in mid-July. This represents an increase of about 19% over seven weeks.
Foreign holdings had already reached Rs 192.86 billion by late August, extending a steady upward trend in foreign participation in the domestic government securities market. The increase is notable against the backdrop of continued changes in domestic bond yields and the broader restructuring of Sri Lanka’s financing landscape.
Taken together, the July credit figures, falling short-term Treasury yields and rising foreign holdings point to a financial system undergoing several adjustments at the same time. The Credit Shift toward stronger private-sector lending is occurring alongside changes in government financing, monetary conditions and investor participation in domestic debt markets.
For policymakers and investors, the developments will remain important to monitor as Sri Lanka balances private-sector credit expansion with public financing requirements and seeks to maintain stability across the banking, currency and government securities markets.