COLOMBO, Dec. 29 (Xinhua) -- Sri Lanka's banking sector, which was adversely affected by the spillover effects of the recent economic crisis, continued to operate amid challenging conditions while some signs of improvement were observed in 2023, the central bank said on Friday.

The central bank said in a press release that the overall economic contraction during the nine months ending September 2023 coupled with tax hikes aimed at supporting fiscal consolidation and elevated price levels and interest rates resulted in strained balance sheets of economic agents.

Accordingly, financial intermediation witnessed a considerable decline reflecting the subdued demand and supply conditions for credit amid a considerable deterioration in credit quality, said the central bank.

The financial market's stress as indicated by the Financial Stress Index remained broadly at low levels in the first 10 months of 2023 as overall market conditions significantly eased compared to 2022, said the central bank.

The comparatively subdued domestic macroeconomic conditions together with tight global financial conditions resulted in a low level of foreign investments in the domestic equity market, said the central bank.

According to the central bank, the financial sector, which experienced an unprecedented array of challenges in the aftermath of the economic crisis, continued to operate under challenging conditions.

The easing of domestic monetary policy since mid-2023 is anticipated to facilitate the recovery in financial intermediation, which was witnessed through the gradual recovery in banking sector credit during the third quarter of 2023, said the central bank. Enditem

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