ECONOMYNEXT – Sri Lanka should control the pressure on the exchange, President Anura Kumara Disssanayake said, presenting a budget for 2026, as the so-called ‘flexible’ exchange rate weakened steadily over 2025, amid current account surpluses.
“We saw two billion rupees of imports in September,” President Dissanayake said. “There are inputs for export and also machinery. We have to capture exports.
“So we have to control the pressure on the dollar. We have some time.”
Sri Lanka’s rupee has weakened from 297.57 to the US dollar by end January 2025 to 304.42 rupees to the end of October 2025, amid record current account surpluses as the central bank bought dollars and pushed the rupee down.
The central bank has allowed large volumes of excess liquidity made of money created in the purchase of dollars to remain unsterilized in 2025, forcing them to be used for imports by private parties or debt repayments by the government.
While the underlying dollars are returned to the government for its notes (unsterilized sales), in 2025, the central bank has not done the same for private importers, leading to depreciation of the currency.
In earlier years the central bank also created money through open market operations, where there were no dollars to return at all when the new liquidity turned into imports as they were turned into imports through imports through investment credit or direct consumption.
At the moment however inflationary open market operations are in abeyance and the short term rates are kept down with ‘signalling’.
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Before the collapse of the Bretton Woods parliaments in Sri Lanka and elsewhere had control of the exchange rate (as an external anchor), through a requirement in the monetary law to preserve the external value of a currency produced by a note-issue bank.
The exchange rate is a simple and transparent mechanism for legislators and the public to control a central bank with an inflation bias and prevent it from operating non-market interest rate structure.
But if there is a policy rate through which a central bank tries to control rates and push up inflation, there is a conflict between anchors, leading to balance of payments trouble and pressure on the exchange rate.
The central bank started to create pressure on the rupee and balance of payments problems from February 1952, primarily by sterilizing part of the outflows to stop interest rates from going up.
But now the rupee is depreciated mostly through exchange rate policy though some liquidity has been injected through buy-sell swaps.
Unlike now, when the International Monetary Fund and central banks in countries with depreciating exchange rate blames ‘overvalued’ currencies or imports, Sri Lanka’s central bank in 1952/53 seemed to had more knowledge of how exchange rates worked, analysts say. (Colombo/Nov08/2025)
