Sri Lanka’s gross official foreign exchange reserves declined by USD 205 million in April 2025, falling to USD 6.33 billion from USD 6.53 billion in March, official data shows. The drop underscores continued pressure on the country’s external financial position despite moderate central bank dollar purchases.
The current reserve level also falls below the USD 6.47 billion recorded in October 2024, when the Central Bank had injected liquidity into the system to suppress overnight interest rates amid a surge in private sector credit demand. Although such monetary injections were discontinued in early 2025, excess liquidity continues to persist due to unsterilized foreign exchange purchases—where the Central Bank buys dollars without offsetting the resulting rupee inflow.
This unsterilized liquidity fuels domestic credit growth, raising imports and thereby undermining the Central Bank’s ability to build reserves. In addition, ongoing sovereign and central bank debt repayments, including those to India for crisis-era loans, continue to erode the Central Bank’s net foreign assets.
While gross reserves remain positive, repayments reduce the actual usable reserves, tightening the country’s financial flexibility. The Central Bank, acting as the government’s fiscal agent, also supplies foreign currency for external debt servicing, further straining reserve levels.
Experts warn that without a shift toward a more deflationary monetary policy—through slightly higher interest rates and better liquidity management—Sri Lanka will struggle to retain its reserves. The Treasury’s reliance on the Central Bank’s policy direction, combined with the absence of an independent forex trading mechanism, adds to the structural challenges.
Under the current “single policy rate” framework, liquidity mismatches are frequent. When the government issues Treasury bills for rupee financing and converts the proceeds into foreign reserves, systemic liquidity contracts, pushing interest rates up. To counteract this, the Central Bank injects liquidity, thereby undermining the tighter monetary conditions needed to support reserve accumulation.
Despite improved tax revenue and a slowdown in government borrowing in early 2025, the country’s reserve position remains fragile. April’s decline suggests that Sri Lanka’s current reserves may be just enough to meet near-term external obligations.
Reserve management continues to follow international best practices under the Central Bank’s oversight. Governance is supported by risk controls, ethical compliance frameworks, and business continuity protocols, all overseen by the International Reserve Investment Oversight Committee and monitored by the Board Risk Oversight Committee.
