ECONOMYNEXT – Sri Lanka’s Increasing frequency and severity of extreme climate events present a growing threat to the island nation’s financial system stability, the Central Bank warns.

In its Financial System Stability Review 2026 report, the Central Bank signaled that climate shocks threaten asset valuations, borrower repayment capacities, credit quality, and overall macroeconomic stability.

The warning underscores how physical climate catastrophes disrupt economic activity, damage productive assets, and directly weaken household and corporate incomes.

These dynamics severely impair debt servicing capacity and elevate credit risks across the financial system, particularly within climate-sensitive sectors like agriculture, fisheries, and infrastructure.

The compounding effects of extreme weather events risk deteriorating overall asset quality, the Central Bank said.

This vulnerability is especially acute in economic sectors that experienced rapid credit expansion in recent years, underscoring the urgent need for financial regulators to monitor the pace, composition, and underlying quality of credit growth across all banking and non-banking institutions, it said.

The Central Bank highlighted recent climate shocks to illustrate the severe financial toll imposed on the island’s macroeconomy.

Cyclone Ditwah, which struck Sri Lanka in November 2025 and affected all 25 districts, resulted in estimated direct physical damages of USD 4.1 billion, equivalent to approximately 4% of Sri Lanka’s Gross Domestic Product (GDP), according to the World Bank’s Global Rapid Post-Disaster Damage Estimation (GRADE) assessment.

The report emphasized that this USD 4.1 billion figure reflects only direct physical destruction to infrastructure, housing, and agricultural assets, completely excluding wider economic losses stemming from lost production, income, and prolonged recovery phases.

Cyclone Ditwah caused widespread damage to physical infrastructure, eroding asset values and directly degrading the underlying collateral securing loans held by domestic financial institutions.

In response to the widespread economic disruption that hampered borrowers’ repayment capacities, regulatory authorities were forced to implement emergency relief measures, including debt moratoria and concessionary repayment arrangements.

However, the Central Bank cautioned that while such relief measures offer temporary breathing room to affected borrowers, they risk distorting the true impact on the financial sector by masking impaired loans and delaying non-performing loan recognition.

Looking ahead, ongoing climatic disruptions, including El Niño-driven weather anomalies, continue to exert mounting pressure on financial institutions.

The Central Bank warned of an impending deterioration in overall credit quality, marked by an anticipated migration of loans into Stage 2 (underperforming) and Stage 3 (credit-impaired or non-performing) categories.

This shift is driven by the constrained debt-repayment capabilities of impacted households, small and medium-sized enterprises (SMEs), and larger corporate entities operating in vulnerable sectors.

In addition to the banking and lending sectors, the Central Bank warned that the domestic insurance industry faces mounting exposure.

Escalating claim payouts for property damage, crop losses, and commercial business disruptions threaten to strain insurer solvency margins and drive up premium costs nationwide.

As extreme weather events evolve from sporadic natural hazards into persistent macroeconomic shocks, the central bank stressed that climate change is no longer merely an environmental concern, but a structural risk to general price levels, production stability, and the resilience of the nation’s financial system. (Colombo/October 12/2026)

ECONOMYNEXT – Sri Lanka’s rupee closed at 330.90/331.00 to the US dollar in the spot market on Monday, from 330.85/95 the previous day, while bond yields closed broadly steady, dealers said.

A bond maturing on 01.08.2030 closed at 11.30/37 percent, up from 11.30/35 percent.

A bond maturing on 15.10.2030 closed flat at 11.37/40 percent.

A bond maturing on 01.02.2031 closed flat at 11.42/47 percent.

A bond maturing on 15.12.2032 closed flat at 11.75/85 percent.

A bond maturing on 15.10.2034 closed at 12.15/20 percent, up from 12.10/15 percent. (Colombo/Oct12/2026)

ECONOMYNEXT – Sri Lanka’s Colombo Stock Exchange closed down on Monday, CSE data showed, with the benchmark All Share Price Index moving down 0.28 percent.

The ASPI was down 56.85 points at 20,260.06, while the more liquid S&P SL20 was down 0.10 percent, or 5.72 points, at 5,783.03.

The ASPI started the week down 57 points from the previous close, amidst a relatively flat day of trading.

Positive contributors to the ASPI were Carson Cumberbatch (up 1.89 percent at 689.00 rupees), Lion Brewery (Ceylon) (up 1.65 percent at 1,829.75 rupees), Overseas Realty (Ceylon) (up 0.80 percent at 50.40 rupees), and Hatton National Bank (up 0.26 percent at 380.00 rupees).

Hemas Holdings (down 1.31 percent at 30.20 rupees), LOLC Holdings (down 1.26 percent at 410.00 rupees), Cargills (Ceylon) (down 2.62 percent at 651.25 rupees), and Vallibel One (down 1.26 percent at 85.90 rupees) were top negative contributors.

Market turnover was 1.19 billion rupees. Consumer services led turnover with 608.02 million rupees.

Turnover was largely supported by crossings, including a 600 million rupee crossing in Ceylon Hotels Corperation (CHOT.N) as well as crossings in CIC Holdings.

“In a relatively flat market it was good to see some of these crossings,” Raynal Wickremeratne, Head of Research and Strategy at NDB Securities, said. (Colombo/Oct12/2026)

ECONOMYNEXT — More than a third of Sri Lanka’s listed non-financial companies did not earn enough operating profit to cover their interest expenses in the first half of 2026, even as total revenues rose sharply, the central bank said.

The share of companies with an interest coverage ratio (ICR) below one rose to 37.7 percent in the first half of 2026 from 33.8 percent a year earlier, according to the Central Bank of Sri Lanka’s Financial Stability Review 2026, which surveyed 204 companies listed on the Colombo Stock Exchange.

An interest coverage ratio below one indicates that a company’s earnings before interest and tax are insufficient to meet its debt interest payments.

“The decline in aggregate profits was largely attributable to higher costs of sales and operating expenses,” the central bank said in the report. “Against this backdrop, creditworthiness showed some signs of moderation, reflecting a slowdown in debt servicing capacity.”

The debt squeeze took place despite strong top-line sales. Overall revenue jumped 22.0 percent year-on-year in the first half of 2026, accelerating from 7.6 percent growth a year earlier. The automobile sector led the surge with revenue expansion of 138.9 percent following the reopening of vehicle imports, while power and energy companies were lifted by higher energy prices.

However, rising business costs outpaced top-line earnings. Higher sales added 199.0 billion rupees to overall corporate revenue, but this gain was largely wiped out by a 152.3 billion rupee increase in cost of sales. Administrative, distribution, and other operational expenses drained another 52.3 billion rupees.

As a result, aggregate net profit dropped 6.1 percent to 136.8 billion rupees from 145.7 billion rupees in the previous year. Operating earnings (EBITDA) also slipped by 0.4 percent.

“Profit contractions at several large corporates outweighed gains at many others,” the report said. “The aggregate ICR fell to 3.7 times from 4.2 times, although it remained comfortably above one, indicating listed companies on average could still meet interest obligations.”

Performance varied widely across sectors. Trading and distribution was the sole sector with an aggregate ratio below one, falling to 0.7 times, while also recording negative net profit against its debt.

Construction and engineering firms carried the highest debt-to-equity levels combined with depressed earnings. In contrast, food, beverage and tobacco companies alongside real estate businesses emerged as the strongest performers.

Corporate borrowing costs as a share of average debt climbed slightly during the period, driven by higher market interest rates following the central bank’s decision to raise its policy interest rate in May 2026. (Colombo/Oct12/2026)

ECONOMYNEXT – Nearly one in every four rupees lent by Sri Lanka’s banks and finance companies is now secured against a vehicle or gold, the central bank said, warning that the growing concentration has left lenders exposed to falling collateral values.

The combined share of motor vehicle credit and gold-backed loans in total financial sector credit rose to 24.9 percent by end-June 2026 from 19.6 percent at end-2024, the Central Bank of Sri Lanka (CBSL) said in its Financial Stability Review 2026.

Vehicle-related credit rose to 12.9 percent of total loans from 9.8 percent as pent-up demand was unleashed after import restrictions were eased in early 2025. Gold-backed lending climbed to 12.0 percent from 9.8 percent over the same period, supported by rising global gold prices.

While overall household debt remains below historical averages, the central bank moved to place targeted controls on these fast-growing sectors to avoid excessive buildup of risk.

When asked whether the Central Bank would move to curtail fast growing household debt Governor Nandalal Weerasinghe responded saying that it was not of concern at the moment.

“Household debt, obviously, people are taking loans for economic activities,” “If that is excessive only we would, that’s why for certain sectors, we brought in certain limits for gold and motor vehicles,” Weerasinghe said.

Overall credit growth across banks and finance companies accelerated from 14.0 percent in June 2025 to a peak of 27.9 percent in March 2026, before easing to 26.4 percent in June. Pawning facilities at banks alone expanded 49.2 percent year-on-year.

The central bank flagged gold as a particular vulnerability after global gold prices fell about 18 percent, dropping from around 1,393 US dollars a sovereign at end-January 2026 to around 1,141 dollars by end-August.

“Further corrections in gold prices could weaken collateral values and increase asset quality risks, particularly given the strong growth in gold backed lending,” the report said.

In response, the CBSL lowered loan-to-value (LTV) limits on vehicles in November 2025 and May 2026. Maximum LTVs for new commercial vehicles were cut to 60 percent and for other new vehicles to 40 percent, while used vehicles were capped at 60 percent. A maximum LTV of 70 percent was imposed on gold-backed loans in May 2026, followed by higher capital risk weights in September.

The curbs have started taking effect, with credit growth at finance companies slowing to 45.0 percent in the June quarter from 52.4 percent in the previous quarter.

“We have tightened monetary policy as well in May, and we have seen the impact of that in the credit figures as well,” Senior Deputy Governor Dr. Chandranath Amarasekara said.

“For the latest month available, we have seen credit to the private sector decelerating — still growing, but decelerating by a substantial extent,” Amarasekara said.

The central bank noted that the full impact of these policy measures will materialize with a lag and will require continued monitoring. (Colombo/Oct12/2026)

ECONOMYNEXT – Sri Lanka’s Colombo Stock Exchange were trending up on Monday, CSE data showed, with the benchmark All Share Price Index moving up a marginal 0.10 percent.

The ASPI was up 20.11 points at 20,337.02, while the more liquid S&P SL20 was up 0.36 percent, or 20.95 points, at 5,809.70.

Positive contributors to the ASPI were Dialog Axiata (up 0.90 percent at 44.90 rupees), SMB Finance (up 10.00 percent at 1.10 rupees), LOLC Holdings (up 1.08 percent at 419.75 rupees), Vidullanka (up 3.26 percent at 22.20 rupees), and John Keells Holdings (up 2.17 percent at 18.80 rupees).

Hemas Holdings (down 1.96 percent at 30.00 rupees), John Keells Hotels (down 3.21 percent at 15.10 rupees), Distilleries Company of Sri Lanka (down 0.20 percent at 50.90 rupees), and Prime Lands Residencies (down 1.91 percent at 35.90 rupees) were top negative contributors.

Market turnover was 54.93 million rupees. Capital goods led turnover with 25.77 million rupees.

Lion Brewery (Ceylon) PLC announced a first interim dividend of 40.30 rupees per ordinary share for the financial year ending March 31, 2027. The total dividend payout amounts to 3.224 billion rupees, with the entitlement date set for October 21, 2026. (Colombo/Oct12/2026)