ECONOMYNEXT – Sri Lanka’s foreign exchange reserves have not grown for several months and have shown a worrying tendency to fall, opposition legislator Kabir Hashim has told parliament.
“Sri Lanka’s foreign reserves have now fallen from the levels seen in October and November 2024,” Hashim said.
“Our foreign reserves are not growing. It is a problem. President has said from time to time that we are saying things to frighten people. But this is the real situation.”
Sri Lanka’s central bank has increased dollar swap transactions with banks, he said.
However foreign reserves have not increased.
In March 2025, gross official foreign reserves were 6,531 million dollars, but four months later in July 2025, reserves were down to 6,044 million dollars.
Net reserves (after swaps) were down from 2,791 million dollars to 2,210 dollars, he said.
The Central bank’s net foreign assets have also fallen in June, he said.
“I am asking whether ‘Is this not a red light? I appreciate the work the central bank has done up to now.
“I agree with Honorable Minister Anil Jayantha, that due to anti-inflationary measures, or deflationary measures, because monetary policy was done properly, we have been able to keep things under control.
“But we made similar warnings during Gotabaya Rajapaska’s time. That is why I said by December this could turn in to a crisis.”
Hashim was also a minister in a government from 2015 to 2019, when the central bank cut rates, enforced them with liquidity injections initially terminating sell-buy swaps (deflationary swaps), followed by inflationary open market operations triggered two currency crises.
In the 2018 crisis, liquidity was also injected through buy-sell swaps, to keep rates down, discrediting the economic credentials of that administration at a time when taxes were raised to reduce the budget deficit and also fuel was market priced.
Rates were cut for ‘flexible’ inflation targeting, claiming that past inflation was low and therefore interest rates could be cut as the private credit recovered.
Taxes on gold was raised and restrictions were placed on vehicle import LCs’ shattering the administration’s free market credentials as the rupee collapsed, pushing up energy prices and triggering losses in energy utilities which also borrowed dollars as forex shortages emerged.
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In addition to gold and car imports, macroeconomists also blamed fleeing foreign investors in rupee bonds who were simply trying to protect their savings from a currency collapse (exchange rate as the first line of defence).
The central bank ran an abundant reserve regime in 2018, pumping the system full of excess liquidity and buying back bills (after also buying bonds violating a longstanding ‘bills only’ policy), to target a mid-corridor rate with abundant reserve regiem.
At the time opposition legislator Harsha de Silva who was a junior minister of the administratration begged in a public forum to allow interbank rates to at least hit the ceiling rate (which would have converted the system to a scarce reserve regime), but he was ignored.
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Due to their policy of giving full central bank independence, nothing could be done to correct rates, until the rupee fell even further and more confidence was lost.
At the time the central bank was also sterilizing interventions to protect its policy rate and banks sold down their bill holdings on a net basis despite the budget deficit being cut by the late Finance Minister Mangala Samaraweera.
The ensuing stabilization crises made the government unpopular as the public held the elected officials responsible for tax hikes, and rising fuel and medicine prices, though there were no street riots.
After the inevitable defeat of that administration, macroeconomists deployed even more aggressive rate cuts, and also cut taxes and triggered forex shortages with complete bans on gold and vehicle imports as well as about 3,000 other items. (Colombo/Aug31/2025)
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