ECONOMYNEXT – Sri Lanka’s Treasury bill yields have edged up, breaking the unusually flat and compressed rates across tenures, seen over several months, data show, which had preceded previous currency crises.
In the past, when public debt was under the Central Bank, Treasury bill rates were suppressed after rate cuts and enforced with inflationary open market operations leading to very quick forex shortages and depreciation.
In 2025, a scarce reserve regime was in force, money printing through domestic operations were reduced, though non-market interest rates were imposed through ‘signalling’.
Signalled Anomaly
After the end of a civil war, Treasuries yields were suppressed to such a level though open market operations that they were made useless as a benchmark to price corporate debt, which then shifted to the average weighted deposit rates.
A quick rise in Treasury bill yields communicates government fiscal needs to the market, which may be temporary or seasonal, crowding out private credit.
However, in 2025 the rupee depreciated as excess liquidity built up from over-purchases of dollars above the central bank’s deflationary policy in what the founder Governor of the central bank John Exter, called a ‘monetization’ of a balance of payments surplus, analysts have said.
Other analysts have called it the ‘Political Ravishment’ of the rupee, in a reference to selectively denied convertibility to private citizens after buying their dollars and creating new money.
Sri Lanka central bank – and many others – escaped accountability for exchange rate stability after the IMF’s Second Amendment to its articles, leading to an epidemic of sovereign defaults and inflation higher than the Great Inflation period.
Before the 1980s Sri Lanka had to same inflation (and interest rates) as developed nations.
Sri Lanka’s Ceylon Electricity Board has sought a hike in tariffs, as the rupee depreciated even as global fuel prices fell. Fuel prices have been hiked in January.
It is not necessary for longer term yields to go up if the fiscal trajectory over the longer term is favourable and the currency does not depreciate, destroying capital.
Sri Lanka’s rate cuts however also came amid very strong private credit growth on so-called flexible inflation targeting and data driven monetary policy.
Analysts have warned that statistical formulae that reject economic theory, primarily Hume’s price specie flow mechanism as well as Ricardo, will lead to external trouble in a reserve collecting central bank.
Bank Interest Rates
A quick pass through of fiscal pressures or private credit, could also push up deposit rates and drive-up savings and reduce consumption.
Sri Lanka deposit rates have also moved up since the controversial May rate cut.
Banks went on a deposit raising drive in the latter part of the year.
“Banks were competing heavily against and taking deposits as we were constrained by interest rate controls,” a top finance company official said.
“But the ‘noise’ about deposits has eased based on advertising and social media activity in recent days.”
Finance companies in 2025 were borrowing from banks through their credit lines as they found it difficult to raise deposits, another official said.
However, credit lines were also restricted in some cases, but have since eased, he said.
Some lenders had seen a reduction in demand for vehicle credits after the central bank increased the loan to value ratio even before cyclone Ditwah.
Meanwhile vehicle importers have said that sales fell in December.
The prime lending rate also fell to 8.98 percent in the second week of January 2026, down from 9.19 percent in the first week.
Amid strong private credit in 2025, concerns were raised that Sri Lanka reserve collections would fall short, as had happened after rate cuts in the post war period, leading to heavy foreign borrowings and eventual sovereign default.
The ‘buffer’ is not historical reserve collections, analysts pointed out, but an ongoing interest rate that reduces private credit and imports allowing debt to be serviced easily.
The IMF revised reserve projection and has since claimed that there is a 700 million dollar external financing gap in 2026.
Sri Lanka’s Treasury does not buy dollars unlike other importers or government departments and depends on central bank dollars, or dollar debt.
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The debt trap analysts have pointed out comes from an ancient privilege given to central banks of yore, called ‘Government Acceptance’ which is choking the Treasury of dollar revenue streams and pushing up dollar debt regardless of tax hikes on the people and businesses.
(Colombo/Jan19/2026)
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