Credit Boom, FX Flows and Imports Redraw Sri Lanka’s Recovery Map

Sri Lanka’s economic recovery is entering a more complex and revealing phase, as the latest data shows an unprecedented surge in private-sector credit, steady but uneven foreign-exchange inflows, and a renewed spike in vehicle-import-related outflows that could challenge the country’s fragile external stability in 2026.

According to Central Bank data, private-sector credit expanded by Rs 1.365 trillion in the first nine months of 2025 alone a surge not recorded since before the financial crisis. Economists say the rapid credit expansion is being driven by revived consumer confidence, pent-up business investment, and broader policy stability following two years of tough reforms.

But the Central Bank is equally alert to the risks. Officials privately acknowledged that such a steep credit spike, if not supported by steady foreign-exchange inflows and disciplined fiscal policy, could spill into renewed inflationary pressure or create vulnerabilities in bank balance sheets.

Foreign-exchange inflows this year have helped soften those concerns. Tourism receipts, remittances, and export conversions brought in more than US$5 billion by the end of the third quarter, while the CBSL remained a net buyer of foreign currency in the domestic market.

Gross official reserves stayed above US$6 billion throughout the year, with the Central Bank projecting inflows from the IMF and ADB in December that would push reserves beyond US$7 billion the highest level recorded since the 2022 collapse.

Financial-sector insiders say the IMF’s fifth tranche of US$340 and the ADB’s US$370 million budget-support disbursement will be critical not only for reserve adequacy but also for boosting investor sentiment at a time when global financial markets remain volatile.

However, the foreign-exchange outflow trend is shifting and vehicle imports are once again emerging as a pressure point.

 With the easing of import restrictions, Sri Lanka has already spent nearly US$1 billion on motor vehicles in 2025. Although the Central Bank noted a drop in the opening of new letters of credit in November, industry sources warn that the appetite for vehicles remains far higher than pre-crisis projections.

If vehicle imports continue at the current pace into early 2026, the trade deficit could widen further, eroding the cushion provided by remittances and tourism, especially during seasonal trough months.

Despite these risks, the Central Bank remains confident of closing 2025 with a current account surplus of around 1% of GDP a rarity for Sri Lanka. Officials believe the recovery in imports is, fundamentally, a sign of economic healing rather than excess consumption.

As growth is expected to hit 4.5% in 2025, the challenge for 2026 will be balancing rising demand with disciplined external-sector management. Economists warn that maintaining stability will require a careful blend of monetary tightening, reserve building, and strict monitoring of import-driven outflows particularly vehicles, electronics and fuel.