📈 Credit Rebound Enters Rate Reality Check

Sri Lanka’s post-crisis credit recovery faces its first major test following a 100 bps policy rate hike in May 2026. While tighter monetary policy aims to tame inflation and stabilize the exchange rate, it is expected to moderate private sector lending momentum. • Overall Growth & Credit: The economy expanded by 5.1% in Q1 2026. Private sector credit surged Rs. 485.4 Bn in Q1 (up 24% YoY) and accelerated by 79.1% YoY in May as borrowers rushed ahead of the rate hike. However, credit-to-GDP remains below pre-crisis levels. • Sector Performance: Q1 recovery was broad-based across all major segments, with Industry leading growth at 7.2%, followed by Services at 3.4%, and Agriculture at 1.1%. Production indicators remain resilient, with manufacturing and construction PMIs in expansionary territory, and cement production up 21.5% YoY during Jan-May. • Fiscal & External Balance: Strong tax revenue growth (+36.4% YoY in Q1) driven by vehicle import-related taxes pushed the budget surplus to Rs. 197.3 Bn (Jan-May) from a deficit last year. The current account had slipped into deficit in Q1 due to a surge in fuel and vehicle imports (US$ 1.8 Bn), offsetting tourism earnings and workers' remittances (up 26.5% YoY to US$ 2.3 Bn). Tighter credit is projected to lower import pressure, steering the current account back to a surplus by June.