By: Staff Writer
January 22, Colombo (LNW): In recent years, Sri Lanka’s central bank has made significant strides toward stabilizing the economy and rebuilding its foreign reserves after grappling with a severe financial crisis. Through prudent deflationary policies and strategic interventions, the central bank has managed to reverse negative trends in its net foreign assets, marking a promising step in the country’s economic recovery.
This data examines the key developments in the central bank’s efforts and the broader implications for Sri Lanka’s financial stability.
Sri Lanka’s central bank reported net foreign assets rising to approximately 310 million US dollars in November 2024, according to official data. This increase stems from the bank’s direct foreign exchange purchases under deflationary policies and its efforts to settle reserve-related liabilities.
Net foreign assets grew from 18.6 billion rupees (about $63 million) in September 2024 to 91 billion rupees by November 2024, as central bank statistics reveal. However, this marks a stark contrast to the situation in August 2021, when net foreign assets turned negative due to the bank’s reliance on borrowed reserves to fund imports and counteract inflationary open market operations aimed at suppressing market interest rates.
By November 2024, Sri Lanka’s gross official reserves—including the central bank’s gross reserves (which include a Chinese currency swap) and Treasury balances—amounted to 6.4 billion US dollars. Previously, the central bank’s policy of using reserves while maintaining low policy rates had exacerbated currency volatility, resulting in a crisis comparable to those seen in parts of Latin America.
During the height of the crisis, Sri Lanka turned to the International Monetary Fund, utilized a special drawing rights allocation, and delayed Asian Clearing Union payments to manage its import needs. Some reserves were also used to settle government debt obligations. By the last quarter of 2022, negative net foreign assets had reached a peak deficit of 4.5 billion US dollars. However, as deflationary policies took effect and private credit demand slowed, the situation gradually improved, reducing quasi-fiscal losses.
The reversal was further supported by the appreciation of the exchange rate under tightened monetary policy. Over the past two years, the central bank has repaid loans from the IMF and the Reserve Bank of India while purchasing dollars through deflationary strategies, which involved selling down Treasury bills to the banking sector.
Despite these gains, concerns arose in October 2024 regarding excess liquidity caused by open market operations. Warnings have been issued that continued liquidity injections could lead to reserve losses and a potential second default as private credit begins to recover.
