By: Staff Writer
December 05, Colombo (LNW): Sri Lanka is intensifying efforts to bolster its foreign reserves to cover $5 billion in debt obligations over the next 12 months, with expectations of improved foreign inflows in 2025 creating healthier liquidity in the domestic foreign exchange market.
Central Bank Governor Dr. Nandalal Weerasinghe emphasized that meeting 100% of the country’s short-term service obligations through reserves ensures financial stability.
Speaking to Central Banking, Weerasinghe highlighted two key metrics for assessing foreign reserves: import coverage and the ability to cover debt obligations for the upcoming year.
He noted that achieving $10 billion in reserves would provide ample coverage for two years, particularly given Sri Lanka’s flexible exchange rate system, which demands less reserve support than a fixed exchange rate.
While the International Monetary Fund (IMF) targets $13.5 billion in reserves by the end of its programme, Weerasinghe affirmed that Sri Lanka is well-positioned to meet this benchmark.
Under the IMF agreement, foreign exchange reserve payments are capped at 4.5% of GDP, further supporting the Central Bank’s strategy.
Strong inflows from worker remittances, tourism, and export performance are expected to accelerate reserve accumulation in 2025, enabling the Central Bank to purchase dollars from the domestic market to build reserves further.
Sri Lanka’s official reserves have been on a sharp upward trajectory. By December 2023, reserves reached $4.4 billion, a 23% increase fueled by disbursements from the IMF, World Bank, and Asian Development Bank.
By April 2024, reserves had climbed to $5.4 billion, the highest level in three and a half years, driven by record-high Central Bank dollar purchases, which outpaced sales since late 2023. This trend has significantly appreciated the Sri Lankan rupee since early 2024.
The tourism sector remains a key contributor to economic recovery. Projected earnings from tourism are expected to rise to $3 billion by the end of 2024, up from $2.1 billion in 2023, as tourist arrivals surpass 2 million. Expanded airline and cruise operations, along with targeted promotional campaigns, have fueled this growth.
Sri Lanka has also emerged as a favored destination over the Maldives, further boosting its appeal. The surge in tourism activity strengthens the local currency through increased foreign exchange transactions, contributing to a favorable current account balance and attracting foreign investments.
As Sri Lanka anticipates economic recovery and potential debt sustainability by August 2024, the country is poised for a credit rating upgrade. These developments, coupled with robust reserve management and growing investor confidence, reinforce Sri Lanka’s path toward financial stability and sustainable growth.
