Sri Lanka foreign reserves rose to 6,166 million US dollars in August 2025, reflecting only a modest increase, as concerns persist over monetary policy, reserve collection, and the impact of rate cuts.
Central bank reserves rise slightly amid policy concerns
Sri Lanka foreign reserves stood at 6,166 million US dollars at the end of August 2025, an increase of 19 million dollars from the previous month, according to official data. Despite the gain, analysts warn that the pace of reserve collection remains slow, raising questions about the sustainability of monetary policy.
Compared with October 2024, reserves have fallen by 306 million dollars. The central bank had then shifted to an abundant reserve regime with a single policy rate, injecting liquidity to maintain short-term interest rates. However, by December, reserve accumulation had slowed sharply, with only 12 million dollars collected from markets.
In early 2025, as credit growth eased, the central bank withdrew liquidity and was able to purchase dollars. Yet, analysts note that the lack of consistent deflationary measures limits the ability to strengthen foreign reserves more aggressively. The central bank continues to earn interest from its bond portfolio—securities accumulated between 2019 and 2022—which provides some deflationary inflows to support reserve purchases.
During the first half of 2025, the central bank also provided 770 million dollars to the government through unsterilized transactions. Experts caution that without tighter policy measures, rising private credit could undermine reserve accumulation and weaken the country’s external position. Calls have been made for the Treasury to directly buy dollars using market-raised rupees or tax revenues, which would help meet debt obligations without fueling inflationary pressure.
At present, the central bank is operating under a scarce reserve regime, refraining from excessive open market operations. The International Monetary Fund has extended technical assistance to refine liquidity forecasting, but a shift back to an abundant reserve framework with a single policy rate has not yet been clarified. Meanwhile, recent rate cuts have been driven by policy signals and dollar-rupee swaps, raising further debate over their inflationary impact.
Sri Lanka foreign reserves play a critical role in supporting exchange rate stability, especially given the country’s past crises. After years of currency depreciation, foreign borrowing, and eventual default, the central bank now faces the challenge of balancing growth with external stability. While growth in 2025 has exceeded the estimated potential output of 3 percent, concerns remain over future policy direction and the transparency of reserve management.