Sri Lanka Treasury must charge dollar taxes to reduce reliance on IMF loans and foreign debt support. Reforming the central bank’s monopoly could secure foreign revenues and protect the nation from recurring currency crises.
Sri Lanka Treasury can end dollar dependency by imposing taxes in dollars and breaking central bank monopoly
Sri Lanka’s Treasury faces persistent challenges in accessing foreign currency to repay debt, a situation that has been exacerbated by reliance on external agencies like the IMF and the Asian Development Bank. Despite receiving approximately USD 350 million from the IMF’s fourth tranche, liquidity pressures remain, highlighting the nation’s vulnerability under current fiscal arrangements.
Traditionally, macroeconomic policy has funneled dollar access through the Central Bank, leaving the Treasury dependent on reserves linked to domestic currency issuance. This approach has fostered a perception that Sri Lanka is a “forex beggar nation,” forced to seek budget support loans from foreign governments and multilateral institutions. Analysts argue that this dependence is not a necessity, but a consequence of a long-standing monopoly on foreign currency management.
The Treasury is, in reality, sitting on significant streams of dollar revenue from exporters, hotels, BPO firms, and freelancers. Yet, these dollars are largely inaccessible due to restrictions imposed by central bank policies, which prevent the direct collection of foreign revenues by the Treasury. As a result, the nation has to rely on borrowing dollars from external sources to meet debt obligations—an arrangement that places unnecessary strain on fiscal stability.
One of the key reforms recommended by economists is to allow the Treasury to charge taxes directly in dollars from entities that earn or hold foreign currency. This would immediately provide the government with a reliable dollar flow without increasing reliance on IMF programs or foreign loans. Exporters, hotels, IT companies, and even institutions like the Sri Lanka Ports Authority could remit VAT and other levies in dollars, creating a sustainable reserve for the Treasury.
The central bank monopoly, rooted in the historic privilege of “government acceptance,” continues to choke the exchequer’s access to foreign currency. While historically this mechanism helped establish credibility for note issuance, it now acts as a barrier to financial independence. Under a political policy rate and inflation-targeting regime, the central bank buys dollars with newly created rupees, effectively monetizing the balance of payments, rather than transferring actual foreign currency to the Treasury for debt servicing.
This structural issue has led to repeated vulnerabilities in Sri Lanka’s fiscal framework. Currency depreciation, inflationary pressures, and debt service obligations have all been exacerbated by the central bank’s exclusive control over foreign reserves. If unchecked, these conditions could trigger another debt crisis, mirroring historical episodes of default. The nation’s past experience in the 1950s and subsequent IMF programs demonstrate that failure to reform the operating framework of the central bank can have severe consequences for both investors and citizens.
Allowing the Treasury to access foreign currency directly, rather than relying on central bank intermediaries, would enable Sri Lanka to build external reserves without creating additional money supply or inflating domestic currency. A system that includes dollar-denominated taxes, combined with robust oversight and strategic deflationary measures, could stabilize the currency and secure repayment streams for sovereign debt. This model would also protect the nation from being forced into recurring foreign borrowing, reducing exposure to volatile capital flows and interest obligations.
Economic experts emphasize that the Treasury’s reliance on foreign borrowing is not inherent to the nation’s fiscal needs but is a result of policy choices that limit revenue collection. By liberalizing the collection of taxes in foreign currency, Sri Lanka could reclaim financial autonomy, reduce its dependency on external programs, and provide long-term stability to the economy.
The urgency for reform is underscored by recent events, including currency depreciation in 2025 amid record current account surpluses. Without immediate changes to the Treasury’s access to dollars and the central bank’s operational framework, the country risks entering another cycle of fiscal instability and external dependence. The solution lies not in additional loans but in structural adjustments that allow the nation to harness its existing dollar revenues.
In conclusion, Sri Lanka Treasury must charge dollar taxes to break the cycle of dependency on foreign debt and IMF support. Reforming the central bank’s monopoly over foreign currency and implementing dollar-denominated taxation can secure the nation’s external liquidity, safeguard citizens from inflationary policy shocks, and ensure that fiscal resources are used effectively for national development rather than servicing recurring debt crises.