ECONOMYNEXT – Sri Lanka’s foreign reserves fell 1.1 percent to US$ 6,851 million by the end of September 2026, down from 6,929 million dollars a month earlier amid central bank purchasing US$64.2  million on a net basis in the month.

The Central Bank has been aggressively buying dollars to boost the reserves. 

Analysts say the Central Bank’s year end reserve target of US$8 billion is achievable with the dollar inflows from the IMF and other multilateral institutions in the final quarter of 2026. 

The Central Bank sold dollars in May amid sharp depreciation of the rupee currency that month

The Bank sold over US$211 million net in May, marking the first net selling in 22 months.

The Central Bank has net bought US$1,548.8 million in the first nine months of 2026 following a net purchase of US$2 billion last year.

The rupee was under high downward pressure in May as the imports bill for fuel rose unusually high following the Middle Eastern escalation amid continued demand for dollars to buy new vehicles.

However, it reversed course and gained in the next two months before falling in September.

The Central Bank has been buying dollars aggressively from the market to boost foreign currency reserves to meet the targets the country agreed with the IMF under the US$3 billion external fund facility and to repay the island nation’s multilateral and bilateral loans.

The Central Bank in May raised its Overnight Policy Rate amid heavy depreciation of the currency.

The Central Bank’s aggressive reserve building comes ahead of the repayment of foreign debts to sovereign bond holders. This repayment is scheduled to start from April 2028.

After successfully exiting sovereign default through a debt restructuring agreement and securing an IMF Extended Fund Facility (EFF) programme, Sri Lanka has been rebuilding its reserves to meet key targets for macroeconomic stability.

For debt repayment, adequate reserves are essential to meet upcoming external obligations without resorting to new borrowing or accumulating arrears.

While Sri Lanka has made significant progress in restructuring bilateral and commercial debts, any sustained erosion of reserves raises concerns about its ability to sustain the recovery trajectory and fully normalize relations with international markets.

Analysts say policymakers will likely need to focus on boosting export earnings, attracting foreign investment, and prudent fiscal management to reverse the decline and safeguard the hard-won gains from the IMF-supported programme. (Colombo/October 11/2026)

ECONOMYNEXT – Sri Lanka has spent less than 30 percent of 2026 capital spending, two government sources said, with the government expects to fully utilize it before the end of this year.

Sri Lanka has allocated Rs.1,380 billion for 2026 capital spending, but has spent only around Rs.385 billion through the first nine months of the year, two government sources familiar with the details told EconomyNext.

Sri Lanka’s chronic failure to utilize its full budgetary allocations for capital investment reflects deep-rooted structural inefficiencies in public financial management and project execution, analysts and economists say.

They warn of lower economic growth in the future if the government fails to implement its planned capital investment projects.

The government has repeatedly said most of the spending occurs in the last quarter of the year.

Cabinet Spokesman and Media Minister Nalinda Jayatissa said on Tuesday (06) that 70 percent of the spending is finalized in November and the government is unable to give an update on the total spending as of that day.

Year after year, bureaucratic delays, protracted procurement disputes, politicized project selection, and a lack of technical expertise within line ministries leave a significant portion of capital expenditure unspent on the Treasury books.

This capital under-utilization carries severe long-term repercussions for the island’s economic trajectory.

By failing to deploy allocated funds into critical infrastructure such as transport networks, modernized power grids, and digital public systems, Sri Lanka suffers from lower productivity growth and worsening structural bottlenecks as well as a decline in overall gross domestic product (GDP) potential.

In a fragile post-default macroeconomic climate, this persistent shortfall also sends a negative signal to international development partners and private investors.

It demonstrates an institutional inability to absorb capital effectively, thereby stalling the very structural transformation required to safely out-grow a historic debt burden.

President Anura Kumara Dissanayake’s government has promised to change the process to fast-track the spending, but the move is yet to materialise, analysts say. (Colombo/October 11/2026)

ECONOMYNEXT – Foreign investors bought Sri Lanka rupee bonds for a second straight week in the week ended on October 9, Central Bank data showed, amid a stable rupee.

ECONOMYNEXT – Sri Lanka Central Bank stubbornly defended the 5% inflation target it recommended and signed with the government for the next three years citing that it was the only “optimal solution” and rubbished claims that the target is high and erodes the purchasing power of the general public.

Economists and monetary policy critics have strongly advocated that the Central Bank lower its official inflation target from 5% to 2%, emphasizing that a lower target is essential to break the country’s historical cycle of currency instability.

Proponents of the 2% target argue that a 5% baseline implicitly embeds a continuous, compounding erosion of domestic purchasing power, increasing price levels by over 15% across a three-year window.

In a country recovering from hyperinflation, critics contend that a targeted 5% annual inflation creates an environment where nominal prices and living costs permanently outpace real wage growth, continually straining lower- and middle-income households.

However, the Central Bank recommended to the government and signed a three-year agreement to maintain the 5% inflation target for the three years through October 2029.

Central Bank Governor Nandalal Weerasinghe explained at a panel discussion with his junior officers that countries choose inflation targets depending on their growth potential and ability to grow.

“So, this is where one can argue, why 2% inflation, is it better? Looking at the purchase power, it looks better, but it’s not better,” he told the gathering in response to a question.

“It is worse, because it will create a country that can grow, much lower below its potential…. It’s not welfare optimization. It will make a lot of people worse off than it will make a lot of people better off.”

A primary structural argument for adopting a 2% inflation target centers on external stability and protecting the Sri Lankan rupee.

When Sri Lanka maintains a 5% inflation target while its key international trading partners such as the United States, Eurozone, and major Asian economies  aim for 2%, a structural inflation differential of around 3% is built directly into the economy.

According to economic theory and historical precedent, this persistent inflation gap exerts steady downward pressure on the domestic currency, forcing nominal exchange rate depreciation.

Advocates argue that lowering the target to 2% would align Sri Lanka with global standards, anchor long-term exchange rate expectations, and prevent recurring balance-of-payments vulnerabilities.

Only 5%

However, Weerasinghe said the 5% target has the “right balance” and the Central Bank had conducted extensive research before arriving at the decision.

“I think, we don’t see any other counterfactual to say, it’s not 5%, it’s 4%, or 2%, or 3%, or 6%, or 7%,” he said.

“A lower inflation target can make the solution worse than what we think…. It won’t be better because everyone can be benefited out of higher growth.”

“If you are coming to a solution, where inflation can drag down the growth below potential, that won’t be the optimal solution.”

“We are all convinced and that’s why we have made the recommendation, government also agreed.”

He said the central bank will reassess and come up with the right level that could be lower in the future and that decision will be data-driven and evidence-based.

Analysts have stressed that a 2% inflation target is critical for lowering long-term interest rates and encouraging capital investment.

Under a 5% target, which carries an allowed accountability band of 2 percentage points, permitting inflation to fluctuate between 3% and 7%, lenders and foreign bondholders demand a higher inflation risk premium to compensate for potential price volatility.

This inflates domestic borrowing costs for both private enterprises and the government. By committing to a tighter 2% anchor, the central bank would provide greater policy credibility, reduce nominal interest rates across the yield curve, and foster a far more predictable environment for long-term private sector investment and debt sustainability.

The data showed, the Central Bank missed the inflation targets for most quarters in the three-year period through end September 2026.

The Bank has blamed lower energy prices for disinflation and missing the target below the lower band of 3% and higher energy prices for breaching the target above upper limit of 7%. (Colombo/October 09/2026)

ECONOMYNEXT – Sri Lanka’s rupee closed at 330.85/95 to the US dollar in the spot market on Friday, from 330.95/331.00 the previous day, while bond yields closed slightly higher, dealers said.

A bond maturing on 01.08.2030 closed at 11.30/35 percent, up from 11.25/35 percent.

A bond maturing on 15.10.2030 closed at 11.37/40 percent, up from 11.30/40 percent.

A bond maturing on 01.02.2031 closed at 11.42/47 percent, up from 11.35/45 percent.

A bond maturing on 15.12.2032 closed at 11.75/85 percent, up from 11.75/80 percent.

A bond maturing on 15.10.2034 closed at 12.10/15 percent, from 12.05/15 percent. (Colombo/Oct9/2026)

ECONOMYNEXT – Sri Lanka’s Colombo Stock Exchange closed higher on Friday, CSE data showed, with the benchmark All Share Price Index moving up 0.41 percent.

The ASPI was up 82.57 points at 20,316.91, while the more liquid S&P SL20 was up 0.45 percent, or 26.19 points, at 5,788.75.

The ASPI ended the week down 496 points from last Friday, amidst a mixed week of trading.

Positive contributors to the ASPI were Dialog Axiata (up 0.91 percent at 44.50 rupees), Hatton National Bank (up 0.93 percent at 379.00 rupees), Commercial Bank of Ceylon (up 0.38 percent at 200.00 rupees), Richard Pieris and Company (up 4.30 percent at 26.70 rupees), and Laugfs Gas (up 7.35 percent at 40.90 rupees).

SMB Finance (down 9.09 percent at 1.00 rupee), LOLC Holdings (down 1.25 percent at 415.25 rupees), Haycarb (down 1.37 percent at 198.50 rupees), and Industrial Asphalts (Ceylon) (down 16.67 percent at 0.50 rupees) were top negative contributors.

Market turnover was 1.05 billion rupees. Diversified financials led turnover with 233.69 million rupees, followed by capital goods with 200.09 million rupees.

During the session, crossings in Lanka Milk Foods (LMF) in the first half of the trading day drew market interest, Raynal Wickremeratne, Head of Research and Strategy at NDB Securities, said.

“Usually 20,000 is also a psychological limit,” Wickremeratne said. “When it comes back closer to that, people also might feel like it’s worth buying, so that’s why sometimes coming close to that you might have a bit of a move.” (Colombo/Oct09/2026)