Sri Lanka private credit expanded by 201.5 billion rupees in July 2025, continuing its strong growth momentum and reflecting increased lending confidence under deflationary monetary policy, though analysts caution over recent inflationary shifts.
Bank lending to private sector grows rapidly despite policy concerns
Sri Lanka private credit recorded another strong month in July 2025, with bank lending to private borrowers increasing by 201.5 billion rupees, official data revealed. The expansion follows June’s record 221 billion rupee growth, highlighting the rapid pace of credit recovery after years of economic instability.
In the first seven months of 2025, private sector credit disbursements have reached 901.6 billion rupees, compared to just 341 billion during the same period last year. On an annual basis, credit growth has surged to 1,485 billion rupees in the 12 months to July, equivalent to a 19.6 percent expansion, compared to 493 billion in the previous year.
State-Owned Enterprise (SOE) credit fell during July, although it remains unclear whether this decline is linked to improvements in the financial position of the Ceylon Electricity Board. Analysts note that while private credit growth is strong, stability depends on how monetary and fiscal policy evolves in the months ahead.
Private credit began to accelerate in late 2023 following Sri Lanka’s currency crisis and sovereign default. The central bank’s adoption of broadly deflationary policy since late 2022, along with a stronger currency, has restored purchasing power, supported investment, and stabilized savings. By keeping inflation lower than its 5 percent target, project costs have remained more predictable, giving businesses and households confidence to plan and complete long-term investments.
However, concerns persist over recent policy shifts. Rate cuts enforced mainly through signalling, alongside limited inflationary swaps, may risk undermining reserve collection while boosting short-term credit and asset prices. Analysts warn that unless strict deflationary measures continue, rising private credit could pressure foreign reserves and destabilize the currency.
The International Monetary Fund’s program currently requires the central bank to build up foreign assets but not reduce domestic assets. Meanwhile, questions have been raised about the government’s buffer strategy, which some argue may discourage banks from rolling over debt and could potentially weaken financial stability if not managed carefully.
Despite these concerns, the growth in Sri Lanka private credit signals renewed investor confidence and a stronger banking sector. The challenge ahead will be maintaining stability while ensuring that expanding credit flows translate into sustainable economic growth without triggering another cycle of currency pressure or inflationary shocks.