Sri Lanka banks have received Rs1.1 trillion in deposits from the government by the end of the second quarter of 2025. This marks a significant concentration of short-term funds, raising questions over liquidity management and fiscal strategy.
Sri Lanka banks see record Rs1.1 trillion in government deposits by mid-2025.
Sri Lanka banks ended the second quarter of 2025 with Rs1.1 trillion in government deposits, according to the Central Bank’s latest Financial Stability Report. A majority of these deposits, around 80.7 percent, were placed in term deposits maturing within a year, while the remaining funds were maintained as on-demand deposits. The central bank highlighted that the absence of long-term maturities underscores the short-term nature of the government’s funding structure.
Although this funding base strengthens Sri Lanka banks in the near term, the maturity profile raises potential liquidity risks in the event of sudden withdrawals linked to macroeconomic pressures. Analysts warn that such concentration of funds, particularly when backed by Treasury bill financing, can trigger ripple effects across the banking system.
Sri Lanka has historically pursued a so-called “buffer strategy,” where the Treasury overborrows to control interest rates and stabilize domestic markets. Critics argue that this approach has contributed to repeated currency crises, particularly during the mid-2010s when policy missteps led to sharp depreciation, higher energy prices, and import restrictions.
When state deposits financed through Treasury bills are recycled into bank lending, Sri Lanka banks often depend on central bank liquidity windows to return funds to the Treasury. This mechanism has in the past led to forex shortages, pressure on reserves, and exchange rate volatility when the government withdraws these funds on a large scale.
The government remains the largest customer of the banking system, and its cash flow management has far-reaching consequences. Interbank liquidity often tightens when deposits are withdrawn, forcing banks to rely on emergency facilities. Analysts point out that managing interest rates through domestic “buffers” is not sustainable in a system with policy rates, unlike countries such as Singapore that use externally invested sovereign wealth funds.
If state banks were to keep these deposits as excess liquidity at the central bank rather than re-lending them, it could initially boost foreign reserves. However, when the funds are later spent in the economy, the liquidity contraction typically leads to pressure on the exchange rate or reserve losses unless the central bank intervenes.
Details on the interest rates attached to the Rs1.1 trillion deposits remain unclear, including whether the funds were raised from tax revenues or rolled over from previous securities. It is also uncertain if the deposits were re-lent to the government at lower rates for shorter durations. Traditionally, banks earn profits by borrowing short and lending long, balancing liquidity with their capital buffers.
The scale of these government deposits within Sri Lanka banks underscores the delicate balance between fiscal policy, monetary stability, and liquidity management. Economists argue that reforming how state funds are deployed within the banking system will be essential to avoid repeating the currency and liquidity shocks of the past.