Sri Lanka's Banking Crisis Reveals Dangerous Public Sector Credit Dominance

In a concerning development highlighting Sri Lanka's economic fragility, domestic credit to the government and public corporations has overshadowed private sector lending for seven consecutive months through February 2022, according to Central Bank of Sri Lanka (CBSL) data. This pattern mirrors conditions last seen during the political turbulence of 1989, raising red flags about economic governance and institutional stability in the region.

Credit Imbalance Reveals Economic Distortions

February 2022 data shows government and public corporation credit reaching Rs 7,331 billion, surpassing private sector credit of Rs 7,051 billion by Rs 280 billion. This gap has been widening since August 2021, marking a significant shift in Sri Lanka's credit landscape that demonstrates the risks of excessive state intervention in financial markets.

Historical Context and Political Parallels

The last time such a credit imbalance occurred was during a 10-month period in 1989, coinciding with major political events including:

• President Ranasinghe Premadasa's election and transition
• IPKF operations in North and East regions
• JVP insurgency against the government

Economic Warning Signs

The current credit pattern, similar to the 1989 crisis, suggests serious structural problems in Sri Lanka's economy. As seen in other regional economies, such as neighboring states facing governance challenges, excessive public sector borrowing often precedes broader economic instability.

The persistent dominance of public sector credit over private sector lending signals a dangerous shift in Sri Lanka's financial system, potentially stifling private enterprise and economic growth.