External risks cloud financial sector outlook despite stronger conditions: CBSL

• Geopolitical conflict in the Middle East, volatility in commodity prices and adverse weather conditions identified as key downside risks that could weigh on the financial sector

Sri Lanka’s macro financial conditions face mounting external risks, with Central Bank warning that global uncertainties could undermine credit quality and test the resilience of the financial system.

The Central Bank, in its ‘Financial Sector Performance in 2025’ report said domestic macro financial conditions strengthened further in 2025, supporting continued credit expansion and improved financial intermediation. 

However, it cautioned that external vulnerabilities remain a concern.

Global uncertainties, including geopolitical conflict in the Middle East, volatility in commodity prices and adverse weather conditions, were identified as key downside risks that could weigh on the financial sector.

“These developments could pose challenges to the credit quality of the financial sector,” the Central Bank said.

The warning comes against the backdrop of a widening credit-to-GDP gap, which has moved further into positive territory, indicating a build-up of cyclical pressures within the financial system and underscoring the importance of maintaining vigilance over potential systemic risks.

The Central Bank stressed that sustained fiscal consolidation remains essential to reducing vulnerabilities, particularly as the financial system continues to expand credit in a strengthening macroeconomic environment. It also emphasised the need to strengthen external sector buffers to safeguard macro financial stability, given the economy’s exposure to global shocks.

Despite these risks, the Central Bank noted that the financial sector remained resilient, supported by improving macroeconomic conditions.

However, it reiterated that continued policy discipline and close monitoring will be critical to ensuring that emerging risks do not undermine the stability of the financial system.