By The Pulseline News Desk
Sri Lanka cannot rebuild its foreign exchange reserves by printing money, distorting markets or piling up foreign debt, Central Bank of Sri Lanka (CBSL) Governor Nandalal Weerasinghe has warned, stressing that the country must build financial buffers before the next crisis hits.
Speaking at a Reserve Management Conference in Colombo, Weerasinghe has described foreign reserves as the country’s first line of defence against external shocks, providing the time and policy space needed to manage a crisis without a disorderly economic correction.
Sri Lanka learned that lesson during the 2022 economic crisis, when depleted reserves crippled imports, fuelled inflation and ultimately contributed to the country’s sovereign debt default.
While external balances have improved since 2023, the Governor has cautioned that rebuilding reserves is not a one-way process. A sudden shock could rapidly wipe out gains.
He has warned that there are no sustainable shortcuts.
Heavy intervention in the foreign exchange market can distort price signals, monetary financing can fuel inflation, while excessive commercial borrowing simply creates another repayment burden.
“A sustainable reserve accumulation strategy is not merely about acquiring reserves; it is about building an economy that naturally generates and retains foreign exchange,” Weerasinghe has said.
That means strengthening the country’s ability to generate foreign currency through exports, tourism, remittances and investment rather than relying on temporary financing.
Beyond months of imports
Weerasinghe has also argued that reserve adequacy should no longer be measured simply by the number of months of imports that reserves can cover.
Sri Lanka must also factor in debt-servicing requirements, volatile capital flows and climate-related shocks when determining how much of a buffer the country needs.
He has stressed that diversification of reserve assets must not compromise liquidity, particularly because reserves are ultimately needed to meet urgent external obligations.
Regional support also proved critical during the crisis, with Weerasinghe highlighting bilateral assistance from the Reserve Bank of India as an important example of regional financial resilience.
Liquidity comes at a price
Asian Infrastructure Investment Bank (AIIB) Treasurer Domenico Nardelli, delivering the keynote address, has warned that even traditionally safe assets such as US Treasuries can face sharp price swings.
He has dismissed concerns about an imminent collapse of the US dollar, noting that it still accounts for around 57% of allocated global reserves.
Gold, despite reaching record prices, also carries risks, he said, as it generates no yield and remains vulnerable to price volatility.
For reserve managers, maintaining liquid assets comes with an opportunity cost — but Nardelli has argued that this should be viewed as the price of protection.
“Liquidity carries an inherent cost of carry,” he has said, describing it as an “essential insurance premium.”
Referring to the collapse of Silicon Valley Bank in 2023 and earlier banking failures, Nardelli has said adequate liquid buffers can provide critical time to reassure markets and meet unexpected cash outflows.
For Sri Lanka, the message is clear: the real test is not how fast reserves can be accumulated, but whether the economy can generate enough foreign exchange to keep those reserves intact when the next shock comes.
Leave a comment