COLOMBO –The International Monetary Fund (IMF) has revised down Sri Lanka’s net international reserve (NIR) projections for 2025, citing updated macroeconomic assumptions in a country report linked to the island’s emergency financing program.
According to the latest review, Sri Lanka’s NIR is now projected to rise to around US$2.16 billion by end-December 2025, down from an earlier projection of US$2.73 billion. While reserves are still expected to increase from US$1.49 billion in 2024, the projected accumulation has been reduced to US$666 million, compared to US$1.24 billion envisaged previously.
The revised projection remains above the IMF program’s end-December target of US$448 million, but analysts warn that the downgrade reflects emerging pressures linked to interest rate cuts, strong private credit growth, and constrained monetary tightening.
Economists have cautioned that loosening monetary policy based on backwards-looking inflation data, without adequately accounting for domestic credit expansion, can undermine reserve accumulation by reducing the central bank’s capacity to purchase and retain foreign exchange.
The impact of Cyclone Ditwah, analysts say, could temporarily support dollar inflows through foreign aid and insurance-related receipts. However, the disaster has simultaneously triggered higher government spending and cash outflows, complicating fiscal and monetary management.
Market observers have repeatedly warned that the current IMF-supported program lacks a binding deflationary ceiling on net credit to the government as a quantitative performance criterion. Without such constraints, they argue, excess liquidity can persist in the financial system, limiting the central bank’s ability to accumulate reserves without putting pressure on the currency.
Attempts to purchase foreign exchange in the absence of sufficient monetary tightening may lead to currency depreciation, even in the absence of an actual balance-of-payments deficit, analysts note.
Sri Lanka’s previous IMF program, which faltered by 2019, was marked by interest rate suppression and inflationary monetary operations, resulting in missed reserve targets, repeated waivers, and sharp currency depreciation that eroded public confidence amid rising food and energy prices.
In 2025, the Central Bank of Sri Lanka has undertaken limited deflationary measures, primarily through coupon payments on its bond holdings and the gradual unwinding of securities accumulated during earlier currency crises. These measures allowed the bank to repay some reserve-related liabilities, contributing to a modest improvement in net reserves.
The IMF program states that authorities aim to accumulate reserves through outright foreign exchange purchases, supported by a non-interest current account surplus, new external financing, non-debt inflows, and sovereign debt relief. Under the plan, Sri Lanka committed to net FX purchases of US$2.65 billion between November 2024 and end-2025, with a further US$1.3 billion targeted in the first half of 2026.
By end-November, the central bank had reportedly purchased nearly US$2 billion, though the rupee weakened during the period despite current account surpluses and fiscal consolidation.
Analysts also note that private credit growth remains strong, raising concerns that any further inflationary interventions, including emergency liquidity assistance, could trigger renewed balance-of-payments pressures.
Meanwhile, the government’s disaster response to Cyclone Ditwah has increased short-term financing needs, with Treasury bill yields edging higher this week amid rising cash requirements.
-ENCL
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