ECONOMYNEXT – Sri Lanka’s central bank has bought 160 million US dollars from the commercial banks in April 2024, after buying 401 million US dollars in March, official data shows.
Sri Lanka’s central bank has bought 645 million US dollars from banks in the first four months of 2025, compared to 1,615 million US dollars 2024.
Under Sri Lanka’s IMF program – unless the reserve targets were adjusted in the new staff level agreement which is not yet public – Sri Lanka has to collect 2.65 billion US dollars from November 2024 to end 2025, to repay debt and build about 900 million US dollars in reserves.
This works out to roughly about 200 million dollars a month.
However, after the central bank made a proverbial helicopter drop of money through open market operations to obsessively target short term rates in the last quarter of 2024, it lost the ability to to collect reserves until credit contracted in January.
As a result, over the last five months the central bank has collected only around 658 million dollars.
The central bank has to buy around 200 million US dollars a month from November and mop up the liquidity (run deflationary policy) to prevent the money being used by the credit system for imports.
If not, the rupee will depreciate as the liquidity is for new loans and they generate imports, or the original dollars purchased to create the new money mop up the liquidity (reserve losses) pushing up short term rates.
If there is no policy corridor, and the lost money is re-printed to offset the dollar sales after credit picks up or the currency depreciates destroying financial savings, analysts have warned that the same result that came with mid-corridor targeting from 2015 will take place and Sri Lanka will default again, regardless of fiscal gains made.
Analysts had intensified warnings from 2018 that the central bank’s operating framework with a high 5 percent inflation target (domestic anchor) and obsessive targeting of short rate rates made a default almost inevitable.
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The agency earns interest on its step-down bond portfolio which can mop up around 900 million US dollars in a year, and there is a small amount of bank re-finance to be repaid.
The central bank has said it plans to sell down its bond portfolio, in which case the chance of a default reduces. The government is totally dependent on central bank deflationary policy to repay debt. (Colombo/May03/2025)
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