Sri Lanka’s reserve management is at a critical juncture. The IMF’s latest report revising the Net International Reserves (NIR) to $2.16 billion by December 2025 underscores that the country remains vulnerable to debt shocks, particularly amid rising private credit and recent pro-cyclical interest rate cuts. Without structural changes, the economy risks repeating patterns that led to the 2019 default.
The central bank has limited room to intervene effectively. Past experiences demonstrate that rate cuts designed to stimulate credit, when not accompanied by deflationary policy measures, erode reserve accumulation and trigger currency depreciation. Analysts highlight that the Treasury’s current dependency on the central bank for dollar acquisition constrains debt repayment flexibility, leaving the economy exposed.
Pragmatic solutions are available. A dedicated dollar trading mechanism at the Treasury, alongside direct dollar taxation powers, would allow proactive reserve management. Additionally, transferring central bank profits in dollars rather than newly issued rupees would reduce inflationary pressure, safeguard reserves, and enhance debt servicing capacity.
Policy coordination between the Treasury and the central bank must prioritize debt sustainability over short-term credit expansion. Lessons from past crises show that political expediency, unchecked rate cuts, and aggressive fiscal concessions compromise macroeconomic stability. Strengthening Treasury autonomy, modernizing reserve management, and implementing quantitative controls on liquidity can prevent a repeat of prior defaults while providing credibility to Sri Lanka’s IMF program.
In essence, avoiding another default requires structural reform, operational independence, and proactive dollar management. By adopting these measures, policymakers can stabilize reserves, safeguard debt repayment capacity, and restore market confidence without undermining central bank credibility.
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