Sri Lanka central bank to disclose forex swaps with local banks as scrutiny intensifies over foreign exchange liabilities and liquidity injections. The move follows concerns raised in Parliament about transparency, reserve adequacy, and the broader macroeconomic impact of swap-related monetary operations.
Sri Lanka central bank to disclose forex swaps with local banks amid scrutiny
Deputy Governor Chandranath Amarasekera confirmed that the Central Bank of Sri Lanka will publish the volume of outstanding swap contracts on an ongoing basis. The disclosure comes amid mounting questions from the Committee on Public Finance regarding the scale and accounting treatment of such derivative transactions.
Foreign exchange swaps, in principle, are short-term arrangements in which the central bank exchanges domestic currency for foreign currency with a commitment to reverse the transaction later. However, concerns arise when these instruments are used not purely for liquidity management but as a mechanism to inject rupees into the banking system. In such cases, swaps effectively monetize foreign assets held by banks, allowing them to extend rupee loans without mobilizing fresh deposits.
Data from the central bank indicate that in 2025, approximately 258 billion rupees, equivalent to around 800 million US dollars, were injected through inflationary swap arrangements. This has raised questions about the true level of unencumbered foreign reserves. When swaps are included within disclosed net foreign assets, the apparent reserve position may differ from the underlying liquid foreign currency available for external obligations.
The Sri Lanka central bank to disclose forex swaps initiative is therefore not merely a transparency exercise. It intersects with broader debates on monetary discipline, exchange rate management, and balance-of-payments sustainability. When banks utilize monetized foreign assets to expand rupee credit, import demand can rise. If the central bank does not subsequently redeem the injected rupees by supplying foreign currency, exchange rate pressures can intensify.
Conversely, if authorities attempt to prevent currency depreciation by selling reserves while maintaining suppressed interest rates, the central bank may accumulate a negative open position in derivatives. This dynamic introduces potential valuation losses, particularly if the currency weakens sharply. The trade-off between rate suppression and external stability becomes acute in such environments.
Sri Lanka’s recent monetary history illustrates these risks. In 2022, following extensive swap operations and other liquidity measures aimed at holding down interest rates, the central bank recorded a foreign exchange loss of 788 billion rupees amid a severe currency depreciation. That episode underscored the fiscal implications of quasi-fiscal monetary operations, as central bank losses ultimately fall within the public sector balance sheet.
Accounting methodology has also attracted scrutiny. Officials have noted that disclosed net foreign assets include swap positions, while associated liabilities are adjusted against net domestic assets because counterparties are domestic banks. Critics argue that such treatment may obscure the extent of derivative exposure, especially when swaps function as de facto borrowings rather than passive liquidity tools.
The Committee on Public Finance, chaired by legislator Harsha de Silva, has questioned the sustainability of rising swap volumes and their impact on reported net international reserves. De Silva has long advocated tighter monetary frameworks to curb excessive liquidity creation and safeguard currency stability. The renewed focus on swaps reflects ongoing efforts to recalibrate the central bank’s operating framework following past crises.
At the core of the issue lies the mechanism of monetary transmission. When the central bank injects liquidity through swaps or reverse repurchase agreements, banks gain access to lower-cost rupee funding. This can temporarily stimulate credit growth and ease financing conditions. However, if underlying fiscal deficits or external imbalances persist, credit expansion may fuel import demand, widening the current account gap.
The Sri Lanka central bank to disclose forex swaps decision could therefore improve market confidence if implemented with clarity and regularity. Transparent reporting enables investors, analysts, and policymakers to assess derivative exposure, reserve adequacy, and potential contingent liabilities. In post-crisis economies, credible data disclosure is often as important as policy action itself.
Nonetheless, disclosure alone does not eliminate structural risk. Sustainable reserve accumulation requires consistent current account performance, prudent fiscal policy, and a monetary framework that prioritizes price stability over short-term growth impulses. Calls to reform or restrict certain swap-based practices have emerged as part of broader discussions on safeguarding the value of the monetary unit.
Swaps with foreign central banks, when notional and unutilized, generally pose limited systemic risk. Problems arise when proceeds are spent domestically while offsetting interventions inject additional liquidity to maintain a single policy rate. In such cases, derivative exposure can amplify external vulnerability rather than mitigate it.
As Sri Lanka continues economic stabilization, the transparency commitment signals an acknowledgment of past imbalances. The disclosure of swap volumes may not resolve policy debates immediately, but it introduces a layer of accountability that markets often reward. The effectiveness of this step will depend on consistent reporting standards, methodological clarity, and alignment with a disciplined monetary strategy.