Sri Lanka’s businesses and households continued borrowing at one of the fastest monthly rates on record in March, despite growing economic pressure linked to the ongoing Iran war and rising global uncertainty.

New data from the Central Bank of Sri Lanka showed that commercial banks expanded private sector loans by Rs. 258.4 billion in March, almost doubling the Rs. 144.4 billion recorded in February and nearing the all-time monthly high reported in November last year.

Private sector credit growth reflects the level of bank lending to businesses and individuals for purposes such as business expansion, imports, working capital, housing, and vehicle purchases, and is generally viewed as a sign of stronger economic activity.

However, analysts say the sharp increase in borrowing may also indicate that businesses were rushing to secure loans before interest rates rise further amid worsening global conditions.

The conflict involving Iran, which escalated at the end of February, has already pushed up global oil prices, weakened regional economic confidence, and added pressure to Sri Lanka’s fragile economic recovery.

Inflation has accelerated in recent months, with Colombo consumer prices rising 5.4 percent in the 12 months to April, compared to 2.2 percent previously.

At the same time, the Average Weighted Prime Lending Rate increased to 9.79 percent, rising by 44 basis points since the conflict began.

Pressure has also intensified in the foreign exchange market, with several commercial banks quoting selling rates of around Rs. 330 per US dollar as the rupee weakens further amid stronger demand for foreign currency.

A weaker rupee is expected to raise import costs, especially fuel prices, potentially worsening inflation and increasing borrowing costs further.

Banks have also begun taking precautionary measures, with several lenders increasing provisions for potential loan losses due to concerns over worsening macroeconomic conditions and geopolitical uncertainty.

Despite these risks, total private sector credit growth during the first three months of the year reached Rs. 485.4 billion, marking a 27.1 percent increase compared to the same period last year.

Markets are now closely watching the Central Bank’s next monetary policy decision later this month for indications on whether interest rates could rise further as inflationary pressures continue to build.