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Operating environment

Operating context and outlook

We recommend the readers to review the Bank's performance detailed in this Annual Report alongside the global and local developments and projections outlined below, since it offers the underlying context for a comprehensive understanding.

Global economy

In 2023, the global economy exhibited resilience amid several significant challenges, including the ongoing recovery from the COVID-19 pandemic, geopolitical tensions resulting from Russia's invasion of Ukraine and the cost-of-living crisis. Despite these hurdles, the global economic recovery remained robust, with inflation falling faster than anticipated from its peak in 2022. This decline in inflation was attributed to favourable supply-side developments and central bank tightening measures, which helped to anchor inflation expectations.

Economic growth exceeded expectations in the second half of 2023, particularly in the United States and several major emerging market economies. Both government and private spending contributed to this upswing, supported by real disposable income gains and a supply-side expansion characterised by increased labour force participation and resolution of pandemic-era supply chain issues.

However, geopolitical tensions, such as the conflict in Gaza and Israel and ongoing warfare in Ukraine, posed risks to the global recovery. Continued attacks in key trade routes and potential supply disruptions threatened to generate adverse shocks to the global economy, particularly in terms of food, energy and transportation costs.

Looking ahead to 2024, global growth is projected to reach 3.1%, with a slight increase to 3.2% in 2025. Despite this positive outlook, forecasts remain below historical averages due to factors such as elevated central bank policy rates to combat inflation and fiscal tightening amid high debt levels. Global headline inflation is expected to decrease to 5.8% in 2024.

Although the likelihood of a hard landing has diminished, policymakers face the challenge of managing inflation while supporting economic growth. This requires a careful calibration of monetary policy and, in many cases, a renewed focus on fiscal consolidation to address budgetary concerns and curb the rise of public debt.

Targeted structural reforms are also deemed necessary to enhance productivity growth and debt sustainability, as well as to facilitate the transition to higher income levels. Additionally, efficient multilateral coordination is essential for debt resolution and climate change mitigation efforts to mitigate the adverse effects of these challenges on the global economy.

World Economic Outlook Projections (% change)

Table – 05
2022 2023 Est. 2024 Proj.
World Output 3.5 3.1 3.1
Advanced Economies 2.6 1.6 1.5
United States 1.9 2.5 2.1
Euro Area 3.4 0.5 0.9
Emerging and Developing Asia 4.5 5.4 5.2
China 3.0 5.2 4.6
India (*) 7.2 6.7 6.5
Russia -1.2 3.0 2.6
World Trade Volume (goods & services) (**) 5.2 0.4 3.3
Oil (***) 39.2 -16.0 -2.3

* For India, data and projections are presented on a fiscal year (FY) basis, with FY 2022/23 (starting in April 2022) shown in the 2022 column. India's growth projections are 5.7% in 2024.

** Simple average of growth rates for export and import volumes (goods and services)

*** Simple average of prices of UK Brent, Dubai Fateh and West Texas Intermediate crude oil. The average assumed price of oil in US dollars a barrel, based on futures markets (as of November 29, 2023), is $79.10 in 2024.

Source: IMF World Economic Outlook – January 2024

2023 2024
Growth Outlook Global growth is estimated to have slowed down to 3.1% in 2023 compared to 3.5% in 2022.
Global growth is projected at 3.1% in 2024 by the IMF. High interest rates aimed at fighting inflation and a withdrawal of fiscal support amid high debt are expected to weigh on growth in 2024.
Inflation Inflation fell faster than expected from its 2022 peak, with a smaller-than-expected toll on employment and activity, reflecting favourable supply-side developments and tightening by central banks, which has kept inflation expectations anchored. Global headline inflation in 2023 is estimated at 6.3% (annual average). Global headline inflation is expected to fall to 5.8% in 2024. The drivers of declining inflation differ by country but generally reflect lower core inflation as a result of still-tight monetary policies, a related softening in labour markets and pass-through effects from earlier and ongoing declines in relative energy prices.
Interest Rates To reduce inflation, major central banks raised policy interest rates to restrictive levels in 2023. The faster-than-expected fall in inflation is allowing an increasing number of central banks to move from raising policy rates to adjusting to a less restrictive stance.
Exchange Rate The dollar ended 2023 with its first loss since 2020 against the euro and a basket of currencies on expectations the U.S. Federal Reserve will begin cutting rates in 2024 as inflation moderates. With inflation hovering well above the Fed’s 2% target and the US economy showing a resilience few had predicted, the markets have priced in a scenario where interest rates remain high for longer.
Trade Global trade has experienced a decline throughout 2023, primarily influenced by diminished demand in developed nations, under performance in East Asia economies and a decrease in commodity prices – UNCTAD. According to UNCTAD, forecast for global trade in 2024 remained highly uncertain and generally pessimistic. While certain economic indicators hint at potential improvements, persistent geopolitical tensions, high levels of debt and widespread economic fragility are anticipated to exert negative influences on global trade patterns.

Sri Lankan economy

Despite facing multiple crises, the Sri Lankan economy has achieved a degree of macroeconomic stability through adherence to the IMF program and its recommendations. Moving forward, the focus is on timely implementation of agreements and resolving issues with external private creditors to restore the country’s debt sustainability over the medium term.

Key priorities for the government include advancing revenue mobilisation, aligning energy pricing with costs, strengthening social safety nets, rebuilding external buffers, safeguarding financial stability, eradicating corruption and enhancing governance, all in line with IMF expectations.

The IMF has emphasised that the Central Bank of Sri Lanka should maintain its focus on a multi-pronged disinflation strategy to safeguard the credibility of its inflation targeting regime, despite challenges posed by the increase in VAT to 18% in 2024 from 15% in 2023.

After bringing inflation down to 12% in June 2023, the Central Bank began relaxing its policy rates in June 2023 to stimulate economic growth. Positive economic growth was recorded in the third quarter of 2023, following consecutive contractions since the first quarter of 2022.

Credit to the private sector staged a recovery in June 2023 after a full year of negative growth, indicating a potential revival in economic activity. The external sector has shown resilience, with stability largely restored in 2023 supported by improved foreign exchange inflows.

Despite challenges, the banking sector continued to operate amidst adverse conditions in 2023, reflecting its resilience in navigating the recent economic crisis. Overall, concerted efforts are underway to address economic challenges and foster sustainable growth in Sri Lanka.

Sri Lankan Economy
2023 2024
Towards the end of 2023, the Sri Lankan economy began displaying indications of a gradual recovery. Following consecutive contractions since the first quarter of 2022, positive economic growth of 1.6% was observed in the third quarter of 2023. However, the overall growth for 2023 is anticipated to be moderately negative with IMF projecting a 3.6% contraction.
Central Bank of Sri Lanka projects that the Sri Lankan economy
will expand by 3.3% in 2024. IMF forecast for GDP growth in
2024 is lower at 1.8%.
Inflation After reaching unprecedented levels in 2022, inflation decreased to single-digit levels by mid-2023. Headline inflation, as measured by
the year-on-year change in the Colombo Consumer Price Index
(CCPI, 2021=100), was recorded at 4.0% in December 2023.
An upward trajectory in headline inflation is anticipated in the near term, largely attributed to changes in VAT starting January 2024. The Central Bank of Sri Lanka aims to maintain CCPI-based headline inflation at around 5%.
Interest rates underwent downward adjustments in response to monetary policy easing initiated by the Central Bank since June 2023. Falling risk premiums, following the finalisation of the Domestic Debt Optimisation (DDO), also contributed to this trend.
More stable inflation rates, improved macroeconomic conditions and other policy measures are expected to alleviate upward pressure on interest rates going forward. However, towards the latter part of the year upward pressure on interest rates is expected in view of anticipated greater government borrowing pressure.
Credit to
Outstanding credit to the private sector by LCBs (month-on-month movement in absolute terms) which recorded contractions from May 2022 to May 2023, started increasing from June 2023. Credit to the private sector expanded notably on a month-on-month basis in November (by Rs. 62.9 Bn.) as well as December 2023 (by Rs. 102.6 Bn.). The gradual normalisation of market lending interest rates, along with improving investor and business sentiments, is anticipated to bolster the expansion of credit to the private sector.
Exchange rate stabilised below Rs. 330 per USD and ended 2023 at Rs. 324.25 per USD (appreciation of 13.18% during 2023). An anticipated growth in imports in the light of an increase in economic activity is expected to exert downward pressure on the rupee although improvements in inflows from multilateral sources are expected to alleviate this pressure to some extent.
The cumulative deficit in the trade account in 2023 narrowed to the lowest since 2010 to USD 4.9 Bn. from USD 5.18 Bn. in 2022. Earnings from merchandise exports declined by 9.1%, to
USD 11.9 Bn. The decline in industrial exports led by garments mainly contributed to the decline in export earnings. Expenditure on merchandise imports amounted to USD 16.8 Bn., recording a decline of 8.1%, year-on-year.
The decline in export earnings, particularly the significant drop in apparel export earnings, remains a critical concern for the Sri Lankan economy on the external front. The revival of apparel exports hinges on the timing of apparel export order revivals. In the event of any delay in this revival, the external current account's stability will heavily rely on earnings from tourism, remittances and services exports.
Credit Rating
Following the completion of the Domestic Debt Optimisation (DDO), credit rating agencies Fitch and S&P upgraded Sri Lanka's long-term local currency sovereign credit rating. Fitch upgraded the rating from RD to CCC-, while S&P raised it from SD to CCC+. If Sri Lanka manages to successfully conclude its external debt optimisation it will help the country to obtain a better sovereign credit rating, thereby paving the way for commercial borrowings.

Bangladesh economy

Bangladesh has emerged as a significant player on the global economic stage. Over the past decade, the country has witnessed remarkable economic growth while making strides in improving various socio-economic indicators. The agricultural sector remains a cornerstone of the economy, contributing significantly to GDP through key products such as rice and jute. Additionally, Bangladesh has solidified its position as a global leader in the garment industry, with the Ready-Made Garments (RMG) sector driving exports and employment opportunities. The services sector, including information technology and remittances, has also become a vital contributor to economic growth.

Despite these achievements, Bangladesh faces persistent challenges such as growing demand for infrastructure and widespread income inequality. However, the government's commitment to foreign investments, infrastructure development and social programs underscores its dedication to achieving sustainable development goals. Bangladesh's economic resilience, demonstrated during times of global adversity, positions it for continued growth and diversification.

In 2023, Bangladesh experienced a strong recovery from the COVID-19 pandemic, but its post-pandemic recovery was disrupted by challenges such as rising inflation, financial sector vulnerabilities, external pressure and global economic uncertainties. Despite these hurdles, the country remained on track to graduate from the Least Developed Country (LDC) status by 2026 and aimed to achieve upper middle-income status by 2031.

The ready-made garment industry continued to be the powerhouse of Bangladesh’s economy, contributing over 80% of total exports. However, challenges such as lower demand among western consumers, geopolitical conflicts and labour unrest impacted export earnings. Additionally, rising fuel costs and energy production deficits strained government finances, leading to the depletion of foreign exchange reserves.

To address these challenges and spur economic growth, Bangladesh focused on increasing investment-to-GDP ratios and implementing various infrastructure development projects. Projects such as the Rooppur Nuclear Power Plant, Metro Rail project in Dhaka and Padma Bridge have significantly improved connectivity and infrastructure across the country. Furthermore, the government aimed to enhance climate resilience through increased investments in adaptation measures.

Looking ahead to 2024, Bangladesh aims to moderate its GDP growth ambitions in light of potential challenges in the export sector. However, solid growth records and proactive policy measures are expected to sustain the country's economic momentum. Despite subdued performance in the capital market and challenges in trade financing, Bangladesh remains resilient and poised for continued growth and development.

Banking sector

In 2023, the Sri Lankan banking sector navigated through a challenging economic landscape marked by multiple crises, including the impact of the COVID-19 pandemic and the need for adherence to IMF programs. Despite these challenges, the sector achieved a degree of macroeconomic stability, with efforts focused on implementing IMF recommendations and restructuring initiatives.

Key highlights of the Sri Lankan banking sector in 2023 include:

  • Loans and advances experienced a contraction on a year-on-year basis, while deposits recorded an increase, indicating mixed performance in credit and liquidity indicators.
  • Profit After Tax of the banking sector significantly increased, attributed to a decline in new impairment allocation by banks, FCY denominated Government securities in particular, reflecting improved financial health.
  • Efforts were made towards strengthening corporate governance frameworks to align with international best practices and enhanced transparency and accountability.

The Bank’s performance compared to the Banking Sector

Table – 06
2023 2022
Banking Sector (*)
End September 2023
Commercial Bank
Market share %
Commercial Bank
Banking Sector (*)
End 2022
Commercial Bank
Market share %
Commercial Bank
Assets and liabilities (Rs. Tn.)
Gross loans and advances to other customers 10.768 1.266 11.76 11.313 1.220 10.78
Deposits 16.061 2.085 12.98 15.299 1.914 12.51
Total assets 19.836 2.580 13.01 19.417 2.426 12.49
Profitability (%)
Return on Assets (ROA) - before tax 1.55 1.27 0.94 1.03
Return on Equity (ROE) 11.24 9.78 10.39 12.46
Net Interest Margin (NIM) 3.60 3.32 3.98 3.74
Cost to income ratio
(excluding taxes on financial services)
40.36 36.11 31.41 26.29
CASA ratio 30.61 39.23 31.18 38.36
Assets quality (%)
Stage 3 loans(a) to total loans and advances(b) 13.41 11.34 11.61 9.41
Net Stage 3 loans(c) to total loans and advances(b) 13.56 5.85 11.26 5.25
Stage 3 impairment coverage ratio(d) 46.89 43.22 45.18 39.60
Total impairment coverage ratio(e) 8.87 7.05 7.88 7.32
Capital adequacy (%)
Core capital (Tier 1 capital) adequacy ratio 13.544 11.442 13.144 11.389
Total capital adequacy ratio 16.367 15.151 16.109 14.657
Liquidity (%)
Statutory liquid assets ratio (SLAR)
Consolidated (Sri Lankan Operations) 45.40 46.06 29.85 35.88
Credit to total deposits 67.04 60.70 73.94 63.71

[(*) Banking Sector = Licensed Commercial Banks + Licensed Specialised Banks (Source: CBSL)]

Notes : (a) Excluding undrawn portion

(b) Total loans and advances including Stage 3 loans

(c) Net of Stage 3 impairment (including undrawn portion)

(d) The ratio of Stage 3 impairment to Stage 3 loans (including undrawn portion)

(e) The ratio of total impairment to Total Loans and advances

Looking ahead to 2024, the Sri Lankan banking sector aims to build upon the progress made in 2023 and address ongoing challenges while capitalising on emerging opportunities.

The outlook for 2024 includes:

  • Implementation of the Roadmap for the Restructuring and Recapitalisation of Nine Large Banks to ensure strong and adequately capitalised institutions.
  • Proposed amendments to the Banking Act to further strengthen the legal and regulatory framework of licensed banks.
  • Establishment of Business Revival Units in licensed banks to support the recovery of businesses, particularly Small and Medium Enterprises (SMEs) and corporates.
  • Encouragement of consolidation among small and mid-sized banks to enhance scale, efficiency and financial strength.
  • Revision and enactment of a new Payment and Settlement Systems Act to facilitate the expansion of payment innovations and digital transactions.

The Sri Lankan banking sector is poised to navigate through uncertainties and challenges in 2024 with resilience and adaptability, driven by concerted efforts to strengthen regulatory frameworks, enhance corporate governance and foster financial stability and growth.

Challenges faced by banks

Challenges faced by banks in 2023

Possible challenges and their impacts on banks in 2024


Possible impacts on banks

Challenges faced by banks in 2023

  • Managing credit risk, fostering growth and maintaining financial stability in a gradually recovering economy that suffered significant downturns
  • Adapting to an environment characterised by high inflation and transitioning to a Flexible Inflation Targeting (FIT) framework
  • Managing excess liquidity resulting from subdued credit growth
  • Navigating the implications of the country's sovereign debt restructuring and the impairment provisioning thereon
  • Reforms and austerity measures and the resulting changes in monetary policy and fiscal measures
  • Deterioration in asset quality requiring higher impairment charges
  • Enhancing crisis preparedness and management frameworks
  • Evolving regulatory requirements requiring investments in compliance infrastructure
  • Changing customer behaviour, technological advancements and increasing competition from non-traditional financial services providers
  • Protecting customer data and infrastructure from cyber threats
  • Managing operating expenses amidst rupee depreciation, inflation and high taxes

Possible challenges and their impacts on banks in 2024

Economic challenges


  • Uncertain macro-economic conditions
  • Growing loan book amidst subdued economic growth
  • Supporting the navigation of fragile economic recovery
  • Adapting to changes in monetary policy, interest rates in particular, which may affect borrowing and lending behaviour
  • Strengthening resilience to adverse macro-financial developments
  • Foreign currency debt restructuring

Possible impacts on banks

  • Need to adapt banking strategies towards supporting economic recovery
  • Increasing focus and resources dedicated to managing NPCFs
  • More focus on supporting customers in financial distress
  • Need to increasingly adapt, innovate and collaborate
  • Difficulties in forecasting key metrics and sustaining strategies
  • Complications on lending and investment strategies and balance sheet management
  • Need for recapitalisation

Regulatory challenges


  • Adapting to new legislation affecting banking operations and compliance therewith
  • Maintaining the required capitalisation levels and liquidity ratios
  • Plans to suspend debt recovery actions by banks
  • Enhancing risk management practices and governance structures
  • Unresolved taxation issue on the haircuts on FCY denominated Government Securities

Possible impacts on banks

  • Loss of business opportunities
  • Potential for further deterioration in asset quality
  • Increase in impairment provisions
  • Decline in profitability as a result of the above
  • Stress on capital adequacy
  • Impact on shareholder returns and potential investment opportunities of taxes paid under protest

Challenges faced by customers


  • Low disposable income due to inflation and high taxation leading to low debt service capacity
  • Less demand for products and services
  • Postponing investment decisions and downsizing of businesses

Possible impacts on banks

  • Increase in NPCFs
  • Missed lending opportunities
  • Excess liquidity being diverted to investments in Government Securities, further increasing the concentration risk

Other challenges


  • Assessing creditworthiness and managing risks associated with lending, particularly in a recovering but still uncertain economic environment
  • Navigate potential volatility in exchange rates and manage associated risks
  • Promotion of Sustainable Finance by developing expertise and adapting lending practices
  • Investing in technology upgrades and cybersecurity measures to ensure the smooth operation of digital payment systems and protect customers from fraud and scams.
  • High levels of resignations among “millennials” and “Gen Zs” for migration
  • Uncertainties in relation to political stability in a year of elections

Possible impacts on banks

  • Need to tighten lending criteria to minimise increase in NPCFs
  • Use of hedging strategies to mitigate potential losses due to currency fluctuations
  • Investing in capacity building to further promote Sustainable Finance
  • Loss of talent could affect service standards and operational efficiencies
  • Adapting HR strategies to attract and retain younger talent
  • Increasing cost of compliance
  • Adapting strategies to shifts in government policies and fluctuations in market sentiment