By: Staff Writer
January 09, Colombo (LNW): Sri Lanka’s foreign reserves, a crucial indicator of the country’s economic stability, are showing steady progress despite recent challenges.
Effective monetary and fiscal policies remain essential for ensuring the country’s ability to meet external obligations while maintaining economic resilience.
The Governor of the Central Bank of Sri Lanka (CBSL), Dr. Nandalal Weerasinghe, stated that foreign reserves are expected to reach USD 7 billion by the end of 2025.
At the close of 2024, Sri Lanka’s reserves stood at USD 6.1 billion after debt settlements, surpassing the initial target of USD 5.6 billion for the year.
Dr. Weerasinghe emphasized that the nation could service annual debt payments of USD 3–4 billion following the debt restructuring program and suggested that maintaining reserves at USD 8 billion would provide a strong buffer for foreign debt obligations.
However, reserves have been declining for three consecutive months, with a drop of USD 360 million in December 2024 due to year-end debt repayments.
Despite this, the country’s official reserves rose by USD 1.6 billion overall in 2024.
Sri Lanka’s gross reserves comprise monetary reserves managed by the central bank and fiscal reserves from the Treasury, often sourced from foreign loans and grants.
Concerns have been raised regarding monetary policy strategies under the flexible inflation targeting model promoted by the International Monetary Fund (IMF).
Analysts have warned that inflationary open market operations, which disregard balance-of-payment dynamics, could lead to recurring currency crises.
For instance, printing excess liquidity to maintain low interest rates often results in increased private imports, which deplete foreign reserves.
Dr. Weerasinghe noted that while reserves were collected on a net basis in December 2024, rebuilding reserves requires deflationary policies and appropriate interest rates.
This strategy ensures excess liquidity is curtailed and prevents loans without adequate deposits, which could otherwise destabilize the economy.
Historically, Sri Lanka has faced external crises during peacetime, exacerbated by inflationary policies and insufficient reserve management.
Moving forward, implementing prudent monetary policies and maintaining sufficient foreign reserves are essential to fostering long-term economic stability and resilience.
