ECONOMYNEXT – Sri Lanka’s central bank has revalued its government securities portfolio booking a book profit and boosting its net assets in November 2025, latest published data show.
Sri Lanka central bank bought large volumes of Treasury bills portfolio to print money through direct and open market operations to control is policy rate from 2020 to 2022, triggering forex shortages and eventual external default.
Before the 2020/22 crisis, the central bank also bought bonds through inflationary open market operations jettisoning a bill’s only policy to mis-target rates along the yield curve in the 2018 crisis for example, critics pointed out at the time.
As part of reducing securities roll-overs (reduce gross financing need) of the government, the bills were converted to bonds with step down coupons, effectively transferring central bank profits to the government through lower interest rates.
The conversion led to a ‘marked-to-market’ style loss in a higher interest rates environment as the bonds were revalued through an imputed method, wiping out the central bank’s equity at the time.
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The revaluation in November 2024 had led to the carrying value of government securities in the balance sheet to go up to 1,741 billion rupees in November 2025, from 1,579 billion rupees in October.
The central bank’s net assets, which were barely in the positive since the domestic debt re-structure, rose to 218.17 billion rupees in November 2025, from 33.65 billion rupees.
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Central Bank Governor Nandalal Weerasinghe has said the agency would look for ways to sell down the securities.
Such process – at an appropriate interest rate – would lead to external stability and the ability to service foreign debt.
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The central bank has sold down its Treasury bills mopping up liquidity (running deflationary policy) steadily since the third quarter of 2022, building foreign reserves at an appropriate interest rate that balanced domestic credit and preventing inflation.
Since the end of a civil war, under ‘flexible inflation targeting’ to drive up cost of living, as soon a statistically lower inflation was reached, had led to an immediate resumption of inflationary open market operations plunging the country headlong into currency crises, critics have pointed out.
Several African countries with similar operating frameworks backed by the International Monetary Fund technical assistance and targets to raise cost of living higher than 5 percent a year in some cases, have also defaulted on external debt without war.
Due to parliaments allowing macro-economists to operate deeply flawed operating frameworks, such countries have exchange and trade controls and frequent IMF bailouts as well as eventual default when they have bullet repayment bonds.
Analysts have warned against a resumption of inflationary policy with aggressive open market operations to target a single policy rate, as it leads to reserve losses, food price rises and stock market bubbles through central bank re-financed margin loans.
Open market operation were invented by the Federal Reserve in 1923 eventually triggering a stock market bubble and the Great Depression ushering in what classical economists call the ‘age of inflation’.
Due to indiscriminate injections of cash into banking systems through open market operations for political purposes of macro-economists (growth, inflation, or employment) countries started to suffer high inflation and economic collapses without war, critics say. (Colombo/Jan13/2025)
