By: Staff Writer
May 11, Colombo (LNW): Sri Lanka’s economic recovery is entering a delicate phase as the Central Bank’s unexpected return to dollar selling fuels fears of renewed currency instability and mounting pressure on the country’s external finances.
For the first time in 22 months, the Central Bank became a net seller of U.S. dollars in April 2026, officially recording net sales of US$13 million. The move has sparked fresh debate among economists and financial analysts over whether authorities are struggling to contain the rupee’s slide toward Rs.320 against the U.S. dollar.
The development marks a sharp shift from the Central Bank’s recent strategy of aggressively purchasing foreign currency to rebuild reserves under the International Monetary Fund-supported reform programme. Since the financial crisis and sovereign default, reserve accumulation has been viewed as essential for restoring international confidence and stabilizing the country’s vulnerable economy.
Although the Bank still recorded net dollar purchases of US$697.2 million during the first four months of 2026, market participants say April’s intervention reflects growing anxiety over accelerating exchange rate pressure and tightening external liquidity conditions.
Sri Lanka’s gross foreign reserves dropped to US$6.58 billion in April from US$7.02 billion in March, representing a significant monthly decline. The reserve erosion has coincided with a rapid weakening of the rupee, which has depreciated by more than one percent during the period ending May 8.
Analysts believe the combination of reserve losses and currency weakness could threaten the country’s still-fragile economic stabilization process. A weaker rupee increases import costs and creates inflationary pressure across multiple sectors, particularly energy, transport, food, and healthcare.
Businesses dependent on imported raw materials are already facing rising operational expenses, while consumers remain vulnerable to another wave of price increases after enduring years of inflation and austerity measures linked to Sri Lanka’s debt restructuring programme.
The Central Bank’s latest intervention may have been intended to smooth excessive volatility in currency markets rather than artificially defend a fixed exchange rate. However, economists caution that continued dollar selling can become risky if reserves continue declining without sufficient foreign inflows from exports, remittances, tourism, or investments.
Sri Lanka is also navigating a complex debt repayment landscape. While repayments to bilateral and multilateral lenders have resumed, the country has not yet restarted payments to sovereign bondholders. Those obligations are expected to resume from April 2028, placing added importance on reserve preservation over the next two years.
Financial experts argue that premature reserve depletion could weaken Sri Lanka’s ability to meet future debt obligations and reduce confidence among international lenders and investors. Some analysts also fear that excessive currency intervention may recreate vulnerabilities that contributed to the country’s earlier balance-of-payments crisis.
Despite signs of economic improvement, including moderate growth and easing inflation compared with crisis years, recovery remains highly sensitive to external shocks and policy missteps. The latest reserve decline and renewed dollar sales underscore the continuing fragility of Sri Lanka’s financial position as policymakers attempt to balance exchange rate stability, debt repayment commitments, and economic recovery.