For the first time in several years, life in Sri Lanka feels less unpredictable. The morning bus fare is the same as last week. The supermarket shelves are full, although not everything fits the budget. The rupee holds steady and salaries, though still stretched, seem to last a little longer.

That quiet relief is what the Central Bank of Sri Lanka (CBSL) describes in its Financial Stability Review (FSR) 2025. The charts and tables indicate the economy is healing. Inflation has cooled, growth is to remain around 5%, and the banking sector, once under severe strain, is stronger than before. 

CBSL Governor Dr. Nandalal Weerasinghe expressed confidence, saying: “Our inflation target of 5% will be achieved next year. We can clearly see that financial stability has improved and overall stability is much better compared to the past couple of years.”

Need to educate the public

Financial sector stability is one of those subjects that rarely makes headlines unless something goes wrong. As Dr. Weerasinghe noted during the press conference on the Financial Review 2025, people tend to pay attention only when the system is under strain.

“Financial sector stability is important for the country. When there is no stability, people start talking; when it is stable, they may not,” he noted.

He added that this was precisely why the Central Bank had decided to hold a dedicated press briefing, to draw attention to a topic that usually stayed in the background until a crisis emerged.

Dr. Weerasinghe went on to outline the scope of the review, which examines the entire financial sector, from licensed banks and non-bank financial institutions regulated by the Central Bank to the financial position of households and other sectors.

Inflation: A sigh of relief

Inflation, the word that once haunted every household, has eased. After the surges of 2022 and early 2023, prices have steadied close to the Central Bank’s 5% target. Families now face fewer surprises at the checkout counter.

For example, a kilo of rice that climbed from Rs. 120 to Rs. 280 might now cost around Rs. 250. This is progress, but it is not yet comfortable. The report notes that real wages, particularly in private and informal work, are beginning to recover. However, the damage caused by two years of soaring prices has not been fully repaired.

A household can once again plan a wedding, a school term, or a small renovation without fearing that tomorrow’s cost will double. The change is not that prices have fallen, but that they have stopped running ahead.

Credit returns, but not evenly

When credit begins to flow, it is often the clearest sign of confidence. The report shows that private sector credit has grown, although it still remains below the levels seen before the pandemic, at about 28.6% of Gross Domestic Product (GDP).

Economists describe the difference between actual and sustainable lending as a credit gap. In simple terms, banks are lending more than before, but the economy has not yet caught up in its capacity to use that credit productively.

Dr. Weerasinghe has explained that this is not a concern at present, because financial intermediation is still well below earlier levels. There is space for growth without overheating.

Across the country, people are starting to borrow again. Leasing companies are busier. Families that delayed buying vehicles or renovating homes are returning to banks. Yet recovery remains uneven. Larger, established businesses find credit more easily than small traders or self-employed workers. The paperwork, collateral requirements, and risk evaluations still shut many out.

Banks remain cautious

The FSR explains why lending has not fully rebounded. Even with improved liquidity, banks continue to hold large portions of deposits in Government securities, which provide safe and predictable returns, rather than extend more loans to the private sector.

This caution stems from experience. The financial stress of 2022 and 2023 left banks wary of risky portfolios and foreign exchange losses. Depositors now see slightly lower interest rates. Borrowers face stricter scrutiny and longer waiting periods.

However, restraint has value. The CBSL reports that capital buffers and liquidity ratios are well above the required levels. 

Households borrow again, carefully

The most visible sign of normal life returning is in household borrowing. During the first half of 2025, household loans grew by 14.8% from the previous year. New lending reached Rs. 1,010 billion, compared with Rs. 736 billion a year earlier.

These represent couples who finally resumed wedding plans, parents who applied for education loans, and families repairing homes long neglected during the crisis.

Still, the Central Bank reminds borrowers to remain cautious. Sri Lankan households already carry high levels of debt, often relying on multiple credit cards or informal lenders to manage expenses. If income growth weakens or inflation rises again, repayment stress could return.

Small businesses begin to heal

Micro, Small, and Medium Enterprises (MSMEs) form the backbone of employment and trade. The review shows their gradual recovery. Credit to MSMEs has grown in sectors such as trade and manufacturing, reflecting renewed activity.

In provincial towns, hardware stores that once struggled now keep shelves full again. Small apparel exporters in Kurunegala have restarted foreign orders that were frozen in 2022. Yet difficulties persist. Tourism-related businesses continue to show higher levels of non-performing loans, and many boutique hotels still carry debts from the pandemic period.

The Central Bank concludes that resilience is broad but uneven. Some businesses are thriving while others simply endure. The determining factor is not demand but access to finance.

Interest rates ease while savings yield less

The report confirms that interest rates have declined. The yield curve for Government securities has moved downwards, and real deposit rates, though still positive, are expected to moderate as inflation stabilises.

For households, this has mixed effects. Cheaper credit makes mortgages and vehicle leases more affordable, but returns on savings and fixed deposits are falling. The era of high deposit earnings is ending. 

Many people are turning to other investments such as land, gold, or small enterprises. From a policy perspective, lower rates encourage borrowing and production. Yet they also challenge retirees and savers who depend on interest income.

External stability and stronger reserves

The external sector, once the source of greatest anxiety, now shows remarkable calm. By August 2025, gross official reserves stood at $ 6.2 billion, a major improvement from the lows of 2022. The rupee weakened slightly but held broadly stable.

A steady currency provides the foundation for confidence. It brings predictability to fuel prices, import bills, and tuition payments abroad. The small exporter in Katunayake can now plan ahead without fearing sudden exchange losses. The family sending remittances faces fewer shocks.

The CBSL has shifted from defending the rupee to purchasing foreign currency to build reserves. Still, the report warns of potential risks from global energy prices or geopolitical tensions. 

Stability maintained through discipline

The FSR summary maintains a measured outlook. The Central Bank expects financial stability to continue, supported by stronger macroeconomic fundamentals. However, it highlights three areas of caution: the widening credit gap, the weight of public debt, and exposure to global conditions.

Dr. Weerasinghe has described the current pace of 5% growth as healthy and sustainable after the shock of recent years. It is not rapid expansion but gradual recovery.

For most Sri Lankans, that stability must still translate into daily reality in terms of steady prices, job security, and affordable essentials. The headline figures matter only if they bring relief to households and businesses.

Risks that require vigilance

The report identifies several risks that could test the system in the months ahead.

First, credit must grow in line with productivity, or inflationary pressure could re-emerge.

Second, household debt remains high and could weigh on consumption.

Third, external shocks such as changes in oil prices or global interest rates may again challenge the currency.

Key takeaways from FSR 2025

1. Inflation is expected to stabilise near 5%, giving households a break from runaway prices.
2. Prices remain high, but they are predictable, allowing families to plan expenses again.
3. Real wages are improving, especially in private and informal sectors, although recovery is uneven.
4. Economic growth is expected to be steady at around 5%, a sign of gradual post-crisis healing.
5. Private-sector credit is growing again, now about 28.6% of GDP, but still below pre-pandemic levels.
6. The credit gap is widening, meaning lending is recovering faster than economic output, although risks remain manageable.
7. Banks are cautious, preferring safe Government securities over risky private loans.
8. Capital and liquidity levels in banks remain comfortably above required minimums, showing stronger resilience.
9. Household borrowing has surged by 14.8% in early 2025, reflecting renewed confidence.
10. Total new household loans reached Rs. 1,010 billion in 2025, up from Rs. 736 billion last year.
11. Families are borrowing for housing, education, and small purchases, but debt stress could return if incomes slow.
12. MSME loans are rising in trade and manufacturing, helping small businesses restart operations.
13. Tourism loans remain under pressure, with many operators still repaying pandemic-era debts.
14. Interest rates have fallen, making borrowing cheaper but reducing income for savers.
15. Deposit returns are shrinking, pushing people to explore alternatives like gold or small investments.
16. Foreign reserves climbed to $ 6.2 billion by August 2025, the strongest position in years.
17. The rupee is stable, with only mild depreciation, bringing confidence to trade and consumers.
18. The Central Bank is now a net buyer of foreign exchange, rebuilding buffers after years of depletion.
19. Key risks ahead include household debt, rapid credit growth, and possible global oil or market shocks.
20. The real achievement is predictability, stable prices, calmer markets, and restored public trust in the financial system.