ECONOMYNEXT – Sri Lanka’s credit to private borrowers from commercial banks fell to 182.8 billion rupees in December 2025 down from a peak of 262 billion rupees in November, as government borrowings spike, official data shows.
Sri Lanka’s banks had loaned 2,056 billion rupees to private borrowers in the whole of 2025, channelling a large volume of savings to non-government sectors which includes purchases of cars.
Car imports however bring large volumes of cash to the government reducing the deficit.
Credit to government, or net credit to government, from banks in December rose by 194.7 billion rupees compared to a 103.5 billion rupee reduction in November.
In December Treasury bill yields spiked with the government also making Ditwah relief payments.
By allowing t-bill rates to go up the Public Debt Management Office may have saved the country from external trouble and prevented the first steps of what could have been a second sovereign default.
Sri Lanka had built a large domestic ‘buffer’ when the public debt was under the central bank, with the intention of manipulating interest rates.
However, analysts had pointed out that domestic ‘buffers’ cannot really control interest rates and an external sovereign wealth fund was needed to do that.
Since the buffer is deposited in state banks, which in turn lends the money in interbank markets, or buy Treasury bills, there is no actual ‘buffer’ in existence, other than excess liquidity deposited in the central bank, which tends to increase foreign reserves.
When government deposits are withdrawn, the banks concerned have to cut interbank credit lines, halt further private credit or stop subscribing to Treasuries auctions as deposits are dislocated.
If the central bank starts open market operations and gives new money to the banks, preventing a crowding out of private credit, a currency crisis could be triggered.
A rise in bill rates would however prevent any imbalance from building by crowding out private credit.
The central bank however did not resume open market operations and also allowed interbank rates to rise, preventing an external crisis and a great loss of confidence in the currency.
In December Sri Lanka was hit by Ditwah, and natural disasters have had a tendency to reduce private credit, trigger inflows and put the currency under appreciation pressure.
Unlike in the tsunami however, the central bank in 2025 continued to repurchase dollars above its deflationary policy, and effectively stopped rupee appreciation in December, despite a call by President Anura Dissanayake in the previous month to stop monetary depreciation.
The call echoed a statement made by then State Minister for Economic Affairs, Harsha de Silva in 2018, when the central bank depreciated the rupee after printing money.
De Silva who is an economist and former bank treasurer, went so far as to tell exactly how to change the operating framework of the central bank to strengthen the currency by allowing interbank rates to go up, and hit the ceiling of the corridor, restoring a scarce reserve regime.
“If it is hitting the ceiling and you’re not injecting money at below 8.5 percent, then it’s alright and there’s no need currently to increase your policy rates,” de Silva said on October 2018, as the government’s economic program and free trade agenda lay in tatters amid rate cuts for potential output targeting and depreciation.
“But at least let the overnight rates be within the higher margin of the policy rate. It’s prudent.
“Of course it’s going to have a negative impact on growth, but that is what we have to give to have some sort of stability on the exchange rate.”
At the time the central bank was also printing money to sterilize interventions, creating a vicious cycle of interventions in a somewhat similar phenomenon OR what David Ricardo called an evil and the ‘Penelope’s web’ (i.e undoing by night what was done in the daytime), in reference to statement by Adam Smith.
De Silva also urged the central bank not to sterilize reserve sales which would allow rates to go up.
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In 2025 however the central bank sold reserves unsterilized to the government and some to the private sector (about 117 million dollars) unsterilized, which tends to prevent depreciation as it leads to a reduction of excess liquidity and a rise in interbank rates.
The central bank also allowed interbank rates to rise to 8.10 percent, about 35 basis points above the single policy rate, allowing the banking system to dissipate any credit shock to the external sector quickly by raising more deposits.
Related : Sri Lanka interest rates rise over 2025 reducing default risks
In 2026, interest rates started to ease.
Analysts have warned that attempts to target a single policy rate through inflationary open market operations, and stop short term fluctuations in interest rates, abandoning a scarce reserve regime would lead to currency trouble and a second default.
The central bank started to create currency trouble around February 1952, about two years after its creation but currency depreciation was banned by the parliament and also its membership in the International Monetary Fund in line with its Articles of Association.
However after the Second Amendment to its Articles (and also Washington consensus) monetary depreciation was encouraged. Among the first victims was Sri Lanka’s reform program under J R Jayewardene and his spending cuts, which turned into a morass of social unrest and runaway deficits.
Sri Lanka (and other countries which went to the third world and so-called ‘first world’ Latin American nations) then started to have higher inflation than the advanced nations and severe social unrest.
Monetary depreciation is a transparent indicator of a flawed operating framework compared to currencies issued by central banks with sounder and more consistent rules. (Colombo/Feb08/2026)