ECONOMYEXT – Net foreign assets of Sri Lanka’s commercial banks rose to 1.74 billion US dollars in March 2025, up from 1.61 billion US dollars in February, official data showed as banks continued to build up overseas foreign currency positions.
Banks at time borrowed abroad through credit lines and syndicated loans to give dollar loans to the government and buy Sri Lanka Development Banks over and above their foreign currency deposit balances.
Banks also bought sovereign bonds with the funds.
After the 2020 rate cuts triggered the biggest currency crisis in the central bank’s history, leading to credit downgrades, banks had to repay maturing foreign credit lines from new customer deposits as foreign creditors refused to roll-over lines.
Banks which were asked by the central bank to make provisions for Sri Lanka sovereign bonds also bought dollars in the domestic market and build up liquid dollar balances.
After the rate cuts which triggered the crisis and default were reversed in April 2022, domestic credit slowed. Initially central banks reserves were pushed further into negative territory.
The central bank also started to collect reserves shortly after India stopped giving dollars to finance private imports driving up the current account deficit and liquidity injections.
Later banks were also repaid Sri Lanka Development Banks in local securities.
Banks then used rupee customer deposits and loan repayments to buy dollars, curtailing domestic credit and investments, which generates the required dollars to purchase.
The overall balance of payment turned positive by September 2022 (which requires deflationary policy). The so-called overall balance is defined in relation to official assets.
Curtailing domestic credit leads to a narrowing of the external current account deficit or turning it a surplus.
By March 2025 the net foreign assets of offshore banking units had climbed to 2.2 billion US dollars.
The liquid dollar balances are now being invested in syndicate loans in India, among other investments.
Commercial banks which collected dollars to cover for Sri Lanka Development Banks and ISB loss provisions placed their fund abroad short-term including at NOSTRO accounts, while some also bought securities like US Treasuries.
Sri Lanka has high savings rates and has absolutely no reason to have forex shortages or repay debt, or even borrow heavily abroad in the first place as long as the parliament is willing to curtail inflationary monetary policy that reject (classical) economics, analysts have pointed out. (Colombo/June11/2025)
