By:Staff Writer
September 02, Colombo (LNW): Sri Lanka’s ambitious target of surpassing US$7 billion in foreign exchange reserves by end-2025 faces renewed challenges, as import outflows continue to climb faster than anticipated despite healthy inflows from remittances and tourism.
According to official data, personal vehicle imports surged to US$506.1 million up to July 2025, compared with just US$34.8 million a year earlier. In addition, US$162.2 million was spent on commercial vehicles during the same period. Together, vehicles alone accounted for over US$668 million, raising concerns about unsustainable pressure on foreign exchange reserves.
Sri Lanka recorded total inflows of US$2.6 billion in July, exceeding imports by US$729 million. However, sustained high-value imports risk offsetting these gains. Personal vehicles are classified as consumer goods, often financed through credit repaid over several years, while commercial vehicles are treated as investment goods. This distinction underscores a structural issue: consumer-driven imports lock in foreign exchange outflows without corresponding productive returns.
Investment goods imports as a whole grew 22.5 percent to US$2.22 billion up to July, with building materials alone at US$569.2 million. Although this reflects renewed economic activity, parallels to 2021—when loose credit and directed lending drove building material imports to US$1.24 billion by December—raise red flags about repeating past vulnerabilities.
Meanwhile, the oil import bill dropped to US$2.25 billion up to July, compared with US$2.54 billion last year, aided by lower global oil prices and increased renewable energy generation. While this has temporarily eased pressure, analysts warn that other categories of imports—especially vehicles are offsetting these gains.
Private sector credit growth, particularly in June, was partly driven by car financing, following central bank rate cuts. Economists caution that such policy shifts may trigger reserve drawdowns to cover debt repayments and imports, undermining external stability. If inflationary policy resumes, even robust inflows from remittances (expected to cross US$6 billion in 2025) and tourism (forecast above US$4 billion) may not be enough to sustain balance.
To achieve the US$7 billion reserve target, Sri Lanka would need to maintain consistent monthly net inflows of over US$500–600 million in the remaining months of 2025. However, with rising import demand and credit-driven consumption, this looks increasingly difficult.
Analysts stress that unless imports, particularly non-essential ones like personal vehicles—are carefully managed, Sri Lanka risks missing its target. The balance between encouraging growth through investment and preventing consumer-driven outflows will be central to the country’s economic stability in the months ahead.
