By: Staff Writer
May 26, Colombo (LNW): Sri Lanka has intensified its monetary tightening campaign as authorities battle mounting inflation and renewed depreciation pressure on the rupee, reflecting growing concern over the country’s external vulnerabilities and import-driven economic expansion.
The Central Bank of Sri Lanka this week raised its Overnight Policy Rate by 100 basis points to 8.75 percent, accepting widespread recommendations from economists who urged stronger intervention to stabilise the currency and contain inflationary risks. The decision comes as the rupee weakened sharply amid rising global energy costs and uncertainty caused by escalating tensions in the Middle East.
The Monetary Policy Board acknowledged that elevated petroleum prices and higher domestic energy costs had significantly contributed to inflation reaching 5.4 percent year-on-year in April 2026. However, policymakers also pointed to stronger domestic demand conditions, rapid private sector credit growth, and rising import expenditure as key factors intensifying pressure on the economy.
Economic experts say the latest policy measures reflect a clear shift toward tighter monetary discipline aimed at preventing a repeat of the 2022 financial collapse. By increasing policy rates, the Central Bank intends to reduce credit expansion, discourage speculative borrowing, and curb demand for imports that continue to drain scarce foreign reserves.
Professor Aminda Methsila Perera noted that excess rupee liquidity within the financial system remains one of the primary threats to external sector stability. He explained that surplus liquidity encourages banks to expand lending, which in turn fuels import demand and increases pressure on the exchange rate. According to him, stronger open-market operations and firm interest rate controls are essential to absorb excess liquidity and stabilise market expectations.
At the same time, fiscal authorities are being urged to implement stricter import governance to complement monetary tightening measures. Analysts warn that the gradual easing of vehicle import restrictions, while beneficial for government revenue, could accelerate dollar outflows if not carefully managed.
Professor Priyanga Dunusinghe emphasised that Sri Lanka must enforce tougher consumption controls and maintain discipline over non-essential imports to preserve foreign exchange reserves. Recommendations include imposing additional customs surcharges on luxury imports to reduce unnecessary spending and support external sector stability.
The Central Bank has also reiterated its commitment to maintaining a flexible exchange rate system rather than artificially defending the rupee through reserve depletion. Gross official reserves stood at US$6.8 billion by the end of April despite ongoing foreign debt servicing obligations.
Authorities expect upcoming multilateral inflows, including the next IMF disbursement and additional support from international lenders, to improve reserve buffers and ease external pressures. Policymakers believe that combining aggressive monetary tightening with strict fiscal management will be crucial in restoring investor confidence, anchoring inflation expectations, and protecting Sri Lanka’s economic recovery.