ECONOMYNEXT – Sri Lanka central bank’s foreign exchange reserves, net of swaps, fell to 2,298 million US dollars in November 2025, from 2,533 million in October before cyclone Ditwah, and a new International Monetary Fund emergency loan, official data show.
Reserves, net of swaps were ,2482 million US dollars in January 2025. Gross reserves were large unchanged.
In January 2025, central bank’s swaps, including one with the People’s Bank of China, which is not inflationary, was 3,548 million US dollars.
By November, buy-sell swaps had climbed to 3,794 million US dollars.
Central bank buy-sell swaps are inflationary, as they monetize dollar balances of commercial banks and give them newly created local currency to give credit and boost imports, leaving the foreign exchange risk with a government agency.
Though the IMF program has put controls on sovereign guarantees on government credit but, no controls have been placed on the limits of foreign exchange risk that the central bank can carry.
In the last crisis after a surrender rule led to a collapse of the currency, the central bank made a 700 billion rupee loss on its swaps.
The Committee of Public Finance of the Sri Lanka parliament has questioned, the central bank’s practice of engaging in risky derivatives.
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In a modern democracy the parliament is the only agency that can tame a central bank, though the legislature is constrained by the practice of ‘instrument independence’, central bank independence promoted by macro-economists in the age of inflation, critics say.
Before the age of inflation, particularly in the UK, parliaments imposed operating frameworks on central banks, killing their ability to repress rates and create external trouble.
Sri Lanka’s central bank has to collect reserves to pay its debts to India, also related to money borrowed to keep rates down during the last economic crisis including through swaps.
In order to collect reserves permanently, which deflationary policy has to be conducted (rupees generated in the purchase of fx has to be extinguished).
However, in 2025, deflationary policy was limited to the coupons on the central bank’s restructured domestic bond stock.
In December the International Monetary Fund gave 206 million US dollar through an emergency loan, after hurricane Ditwah hit, making it the 18th IMF loan taken by the country after the main program was delayed by extra budget spending.
Analysts had warned throughout the year that reserve projections were compromised by a flaw in the quantitative targets of the IMF program which did not force a sell down of central bank held bonds.
Since a central bank creates money through the purchase of dollars, an action the agency’s founding Governor John Exter called the monetization of the balance of payments, the money will eventually return to fx markets as imports through the credit system.
If the dollars were not returned, the currency would depreciate.
In 2025, the central bank depreciated the currency from around 290 to 310 to the US dollar.
Unsterilized rupees from buy-sell swaps would put similar pressure on the currency unless they were extinguished through an unsterilized sale of dollars.
Some dollars were given to the government in 2025 through unsterilized sales, preventing a further collapse of the currency.
Macro-economists have also claimed that that exchange rates are ‘market determined’ but exchange rates are the end result of the operating framework of the central bank.
Exchange rates are purely the outcome of monetary policy in the case of floating exchange rates and a combination of money and exchange policies in the case of a soft-pegged or flexible exchange rate.
When money and exchange policies are in conflict, a currency will depreciate against another currency with a better operating framework.
Before the IMF’s Second Amendment central banks were not allowed to escape accountability claiming money was ‘market determined’.
If money is market determined, like carrots or beans, an economy is reduced to a primitive stage of barter, economic analysts have pointed out.
The entire idea behind money is that it is not market determined, and it is a unit of account which can be used as a store of wealth and a standard of deferred payments.
The inflationist operating framework of the central bank, which has led to serial currency crises since the end of a civil war and eventual default and also led to reform reversals by previous governments, critics have said. (Colombo/Jan17/2026)