By: Staff Writer
August 04, Colombo (LNW): Sri Lanka is walking a fiscal tightrope as it seeks to sustain macroeconomic stability amid rising vehicle import pressures and stringent IMF foreign reserve targets. While the country reported a significant current account surplus in June 2025 and robust export growth, analysts warn of looming risks if import demand outpaces sustainable foreign inflows — especially with Letters of Credit (LCs) worth $1.2 billion already opened for vehicle imports.
Strong External Earnings in June
Sri Lanka recorded foreign exchange earnings of $2.285 billion in June 2025, according to official data, buoyed by goods exports, worker remittances, and services exports — including tourism and IT/BPO services. This figure exceeded monthly goods imports by $604 million, reflecting a positive trade balance.
Goods exports rose by 6% year-on-year to $1.14 billion, while remittances surged 22% to $635 million. Services exports, which totaled $508 million, were driven largely by IT/BPO services ($338.5 million) and tourism ($169.5 million) which are at risk due to heavy taxation .
The Central Bank of Sri Lanka (CBSL) reported that total exports (goods and services) for June stood at $1.46 billion, an 8.73% year-on-year growth. For the first half of 2025, merchandise exports reached $6.5 billion (up 5.86%), and total exports climbed to $8.34 billion, a 6.7% improvement over the same period last year.
Rising Imports: Investment or Inflation Risk?
Despite strong inflows, concerns are mounting about the pace of import growth, especially in non-essential sectors. Imports rose to $1.682 billion in June from $1.507 billion in May — a sharp increase partly driven by a rebound in investment goods and base metals, which climbed to $378 million.
The pressure is now intensifying with the government confirming that $1.2 billion in LCs for vehicle imports have been opened since February.
Analysts warn that this sudden surge in consumer imports — after a near five-year restriction — could strain foreign reserves unless matched by stable, sustainable inflows. While credit conditions remain tight, any relaxation through expansionary monetary policy — such as rate cuts or liquidity injections — could aggravate forex shortages and undermine IMF benchmarks.
IMF Benchmarks and Reserve Risks
Sri Lanka’s program with the International Monetary Fund (IMF) mandates the maintenance of adequate gross official reserves and disciplined fiscal and monetary policy. Any misalignment — such as allowing credit-fueled imports without corresponding foreign currency earnings — risks missing targets and delaying fund disbursements.
Critically, reserves are essentially domestic savings invested abroad. Weak credit growth helps suppress imports and allows reserve buildup. However, if the central bank cuts rates or injects liquidity under the guise of flexible inflation targeting, this could lead to higher domestic consumption and reduced forex accumulation, especially if the rupee comes under pressure.
Indeed, despite running a record current account surplus in the first half of 2025, the rupee has depreciated modestly. This paradox reflects ongoing central bank dollar purchases for reserve accumulation — but without adequate fiscal tightening or genuine deflation, such efforts risk backfiring.
The Road Ahead
The return of vehicle imports signals a growing appetite for consumption — a politically popular but fiscally risky move. With Sri Lanka still recovering from a deep economic crisis, policymakers must ensure that macroeconomic discipline isn’t compromised.
The government must now strike a careful balance: supporting growth through investment and export promotion, while ensuring that rising imports — particularly of non-essential goods — don’t derail progress made in stabilizing external accounts. Adherence to IMF benchmarks, prudent credit management, and a focus on sustainable FDI and service exports will be critical in avoiding a repeat of past vulnerabilities.
In this context, the months ahead will test Sri Lanka’s economic management — as it navigates between external confidence and internal consumption demands, all under the close watch of its international creditors
