By: Staff Writer
June 01, Colombo (LNW): Sri Lanka’s approach to foreign reserve accumulation has come under renewed scrutiny following remarks by International Monetary Fund (IMF) Mission Chief Evan Papageorgiou, who defended the longstanding practice of relying on the Central Bank rather than the Treasury to purchase foreign currency reserves.
Speaking to reporters after the IMF approved the latest reviews of Sri Lanka’s reform program, Papageorgiou dismissed concerns over the Treasury’s limited role in managing foreign exchange. He explained that central banks traditionally act as intermediaries in financial markets and are therefore better positioned to handle reserve accumulation and foreign currency transactions.
“The Treasury does not typically deal with foreign exchange operations,” Papageorgiou said, noting that similar arrangements exist in many countries and should not be viewed as unusual.
However, the issue has sparked debate among economists and monetary policy analysts who argue that Sri Lanka’s reserve-building model may carry significant risks. Critics point out that when the Central Bank purchases dollars from the market, it often injects newly created money into the financial system. This process effectively monetizes balance-of-payments inflows, increases reserve money, and can generate excess liquidity within the banking sector.
Calls have emerged for the Treasury to be allowed to purchase and hold its own foreign reserves independently, thereby reducing pressure on monetary policy. Supporters of this approach argue that Treasury-led dollar purchases could be structured in a way that remains neutral to reserve money growth and avoids inflationary side effects.
Former Deputy Governor W.A. Wijewardene recently highlighted concerns over the Central Bank’s inflation-targeting framework. He argued that policy rate reductions, expansion of private-sector credit, and sustained foreign exchange purchases have contributed to rapid growth in reserve money. According to Wijewardene, these policies are linked to efforts to maintain a 5 percent inflation target while simultaneously building reserves.
Sri Lanka’s history of monetary instability continues to influence the debate. Since the establishment of the Central Bank in 1950, the country has experienced repeated currency crises, including several episodes during IMF-supported programs. Analysts have attributed these crises to a range of factors over the decades, from external shocks and capital outflows to policy inconsistencies and reserve management challenges.
Warnings also surfaced in early 2025 that reserve accumulation could become increasingly difficult as private-sector credit growth accelerated. Some analysts argued that interest rates were not sufficiently restrictive to support reserve targets, while liquidity injections through foreign exchange swaps further complicated the Central Bank’s efforts.
Although the current IMF program includes reserve accumulation targets and limits on domestic asset expansion, concerns remain about whether those goals can be achieved without triggering new imbalances. Analysts caution that excessive dependence on Central Bank dollar purchases could undermine reserve objectives, weaken currency stability, and expose the economy to future financial stress.
As Sri Lanka seeks to maintain fiscal discipline and rebuild economic confidence, the debate over who should manage foreign reserve accumulation the Treasury or the Central Bank—appears far from settled.