Sri Lanka foreign reserves dropped to $6,083 million by November 2025, reflecting ongoing monetary challenges and rate cuts. Analysts warn that maintaining reserve stability will require strict deflationary policy and careful fiscal management in the months ahead.
Sri Lanka foreign reserves decline amid rate cuts and rupee depreciation
Sri Lanka’s foreign exchange reserves fell to $6,083 million by the end of November 2025, marking a $256 million decrease over the year, according to official data. The month alone saw reserves drop by $133 million, highlighting ongoing pressures on the central bank amid recent monetary policy adjustments and efforts to stabilize the economy.
Since October 2024, Sri Lanka has struggled to build gross reserves. Critics note that the central bank’s deployment of inflationary open market operations—including printing roughly 100 billion rupees—resembled a floor system, or a “true single policy rate,” which impacted reserve accumulation. In the first quarter of 2025, some of these operations were reversed through a deflationary approach, and $400 million was purchased in March, temporarily boosting reserves to $6,531 million.
Gross official reserves include not only cash balances but also Treasury loan receipts and tranches from the IMF. In December, Sri Lanka is expected to receive an additional $400 million from the Asian Development Bank, primarily for budget support, with another $100 million approved recently. These inflows are intended to cushion the country against ongoing fiscal and monetary pressures.
Monetary policy in 2025, particularly the rate cuts in May, has been criticized for mis-signaling the banking system, even though a scarce reserve regime was re-established. As private credit expanded and deposit rates bottomed out, the central bank engaged in buy-sell swaps, injecting liquidity into the system while constraining its ability to purchase dollars outright. Some of these operations have since been unwound, helping to extinguish excess rupees and partially preserve reserves.
Analysts caution that flexible inflation targeting—cutting rates based solely on statistical inflation—has historically undermined Sri Lanka’s reserve accumulation. True interest rates are determined not just by headline inflation but by domestic credit conditions and reserve targets. For the central bank to collect and retain reserves, deflationary policies are essential, particularly to service debt repayments to the IMF and the Reserve Bank of India, totaling over $1.1 billion.
Over-purchasing dollars without sufficient deflationary measures contributed to a sharp depreciation of the Sri Lankan rupee in 2025. Despite record current account surpluses from debt repayments, the rupee declined from 292.58 per USD in December 2024 to 308.02 per USD by November 2025. This depreciation has confounded many macro-economists, who typically associate currency pressures with current account deficits rather than surpluses.
President Anura Dissanayake has emphasized the importance of a stable exchange rate in his 2026 budget proposals, noting that it reflects the government’s sound economic policies. However, the floor rate inflation target of 5 percent, sanctioned during his tenure, adds further complexity to maintaining both price and currency stability.
The ongoing IMF program review, initially expected to be completed earlier, may now be delayed until February 2026. Additional funding is anticipated through a new program, which will aim to support Sri Lanka’s foreign reserves while addressing macroeconomic vulnerabilities, including fiscal deficits and external debt obligations.
Moving forward, analysts suggest that strict deflationary measures, combined with careful debt management and targeted external support, will be crucial for Sri Lanka to stabilize its reserves. Balancing reserve accumulation with currency stability remains a key challenge for policymakers navigating a complex post-pandemic and post-cyclone economic landscape.
Maintaining adequate reserves is not only essential for monetary policy credibility but also for investor confidence, import financing, and the overall resilience of the Sri Lankan economy. The coming months will test the central bank’s ability to manage liquidity, support economic growth, and prevent further rupee depreciation while meeting IMF and domestic fiscal targets.