CBSL Governor hails rare fiscal discipline; Govt. to beat targets for first time

CBSL Governor 

Dr. Nandalal Weerasinghe 

– Pic by Upul Abayasekara

• Says Govt. revenue to surpass 15.3% of GDP target, and primary surplus more than 2.3%
• First fiscal outperformance in decades, improving debt dynamics
• Private sector credit gradually recovering as public sector borrowing eases
• Credit growth reflects a steady, not overheated, economic rebound
• Inflation projected to stabilise at 5% next year, with GDP growth around 5% 

Central Bank Governor Dr. Nandalal Weerasinghe yesterday gave a strong signal about the Government’s improving fiscal performance with key indicators expected to exceed expectations as never before.

“The Government’s fiscal performance is exceeding expectations, with stronger revenue and tighter spending producing a lower deficit, marking the first time in decades that fiscal targets have been surpassed,” Dr. Weerasinghe said. He said the outcome reflects a rare display of discipline that has strengthened debt dynamics.

Speaking at a presentation on the CBSL’s Financial Stability Review 2025 Dr. Weerasinghe said the Government’s fiscal performance this year is more positive than projected, noting that the primary surplus and revenue ratios are expected to surpass budget targets. 

“Revenue targets of 15.3% of GDP will be exceeded and the primary surplus, estimated at 2.3%, will also be higher than expected,” he said. 

Expenditure is broadly in line with projections, leading to a lower-than-anticipated fiscal deficit. “This means debt dynamics are now better than what was expected earlier,” he added, describing it as the first time in decades that actual fiscal results may outperform budget forecasts.

On credit conditions, the Governor said financial intermediation and private sector credit remain below pre-crisis levels but are gradually strengthening in line with the ongoing economic recovery. He said the shift in lending from the public to the private sector was a positive development. 

“The share of public sector credit is coming down, creating more space for private credit growth. Private sector credit is still below pre-pandemic levels, but this is consistent with a recovery that is steady rather than overheated,” he said.

Dr. Weerasinghe dismissed concerns about systemic risks in the credit market, explaining that the widening credit gap reflected a rebalancing of credit flows rather than instability. 

“Financial intermediation remains below previous levels, but the ongoing shift is part of a sustainable credit recovery,” he said, adding that the Central Bank continues to monitor sectoral exposure closely.

He said inflation is expected to stabilise at the 5% target by next year and that financial stability indicators have improved considerably. “The economy is now growing around 5%, a healthy pace following the contraction in 2022 and 2023, and we project 4% to 5% growth next year,” he said.

Dr. Weerasinghe also noted that the Government’s strong revenue collection this year was partly due to a temporary surge in vehicle imports following the easing of restrictions (see box story).

Commenting on financial system developments, he said banks’ margin trading exposure remains small, with total margin loans increasing from Rs. 14 billion in January to Rs. 60 billion by end-August. He also said that most finance company lending continues to be concentrated in vehicle leasing, while mortgage-backed lending remains limited.

Dr. Weerasinghe said the Central Bank continues to work with banks to reduce intermediation costs and interest margins through transparency, competition, and improved asset quality. “Net interest margins are still above 4% but are expected to narrow as the financial sector stabilises,” he said.

The Governor concluded that overall macroeconomic and financial conditions are improving steadily. “We see stability returning across the fiscal, monetary, and financial fronts. The key task now is to sustain these gains through disciplined fiscal management and continued confidence in the financial system,” he said.