Sri Lanka’s Reserves: Build Them Wisely, Not at Any Cost
“The whole is greater than the sum of its parts.” — Aristotle
By Prof. Asoka.S.Seneviratne
Summary
The Governor of the Central Bank of Sri Lanka, Dr Nandalal Weerasinghe, deserves credit for placing the question of foreign-reserve accumulation within its proper broader context: reserves cannot be built sustainably at any cost. At the Reserve Management Conference 2026 ,(https://www.lankabusinessonline.com/2026/09/11/build-buffers-before-the-storm-central-bank-governor-tells-reserve-managers/), Governor emphasised that reserve accumulation must be supported by fiscal credibility, monetary credibility and sound external-sector fundamentals. These are important principles.
However, for Sri Lanka, the next step is to move from general principles to a more clearly defined policy framework. What, precisely, constitutes adequate reserves for a post-2022-crisis economy? How should reserves be measured against imports, short-term external liabilities, debt-service obligations, broad money, exchange-rate pressures, and external shocks? And how can fiscal policy and monetary policy remain consistent while preserving the operational independence of the Central Bank?
These questions deserve deeper discussion. The 2023 Central Bank Act has already created a Coordination Council for this purpose. Rather than creating another institution, Sri Lanka should strengthen this mechanism so that fiscal and monetary authorities can exchange information, assess risks, and maintain policy consistency without compromising the independence of the Central Bank.
The Governor’s intervention therefore provides an opportunity to go one step further: from explaining why reserves matter to establishing a transparent, measurable, and Sri Lanka-specific reserve adequacy strategy.
1. The Governor’s Central Message Is Fundamentally Right
The Governor’s observation that reserve building “cannot come at any cost” is an important one.
Foreign reserves are not simply a number to be accumulated for display. They are an insurance mechanism. They provide resilience against external shocks, support confidence in the economy, help meet external obligations and provide room for the authorities to respond to disorderly market conditions.
The current CBSL framework already recognises this broader role. The Bank has been accumulating foreign exchange through market operations while maintaining a flexible, market-determined exchange rate and intervening to reduce excessive short-term volatility.
The Governor is therefore right to emphasise quality and sustainability rather than reserve accumulation as an end in itself.
But this raises a more fundamental question: how much is enough?
That is the question Sri Lanka should now answer systematically.
2. From General Principles to a Sri Lankan Reserve Adequacy Framework
Traditionally, reserves have often been discussed in terms of months of imports. This remains useful, but it is no longer sufficient for a country such as Sri Lanka.
The 2022 crisis demonstrated why.
A reserve stock can look comfortable relative to imports and still become inadequate when a country simultaneously faces large external debt-service payments, capital-flow pressures, foreign-exchange demand, banking-sector pressures and declining market confidence.
Sri Lanka therefore needs a multidimensional reserve adequacy framework.
It should consider, at a minimum, prospective imports; short-term external liabilities; scheduled external debt-service payments; foreign-currency obligations of the banking and financial system; broad money and potential capital outflows; likely current-account pressures; and the country’s capacity to obtain emergency external financing.
The IMF’s Assessing Reserve Adequacy framework provides one useful reference point. The IMF’s current projections for Sri Lanka also illustrate why several indicators should be considered together: projected gross reserves are assessed not only in months of imports but also against the IMF’s composite Assessing Reserve Adequacy (ARA) metric.
Sri Lanka should go further by developing a country-specific reserve adequacy matrix, reflecting its own external debt structure, import dependence, tourism and remittance flows, capital-account characteristics, and exposure to global shocks.
That would be a significant policy contribution.
3. What Is the Appropriate Reserve Target After the 2022 Crisis?
This should now become a central question for Sri Lankan economic policy.
Instead of asking simply whether reserves have increased, policymakers should ask whether the reserves are sufficient to withstand a realistic external stress scenario.
For example, what would happen if petroleum prices increased sharply, tourism receipts fell, remittances weakened, foreign capital outflows increased, and a large external debt-service payment became due at the same time?
A prudent reserve-management framework should therefore establish at least three levels: a minimum safety level, a normal operating level and a strategic resilience level.
The minimum level would protect essential external payments and financial stability. The normal level would support orderly functioning of the foreign-exchange market. The strategic level would provide sufficient protection against a severe but plausible external shock.
Such a framework would be much more informative than announcing a particular reserve number without explaining the risks that number is intended to cover.
It would also allow the public to understand why reserves may sometimes appropriately be increased and why, at other times, accumulating additional reserves may impose high economic costs.
4. Reserve Accumulation Has an Opportunity Cost
This is where the Governor’s statement deserves particular attention.
Building reserves is not free.
Foreign exchange may be purchased by the Central Bank from the domestic market, but the broader economy must generate the foreign exchange in the first place. Sustainable reserve accumulation therefore ultimately depends on exports, tourism, remittances, foreign investment, external borrowing on sustainable terms, and a manageable import structure.
There is also a domestic monetary dimension. Central Bank purchases of foreign exchange can inject rupee liquidity into the banking system, which subsequently has to be managed through monetary operations. The CBSL’s current market-operations framework explicitly recognises the interaction between foreign-exchange purchases, domestic liquidity and monetary-policy implementation.
Consequently, reserve accumulation cannot be considered independently of monetary conditions.
Nor can it be considered independently of fiscal policy.
This is why the Governor’s reference to the need for fiscal support is important—but it needs greater precision.
5. What Does “Fiscal Support” Actually Mean?
The expression “fiscal support” can mean many things.
(i) Does it mean stronger revenue mobilisation? (ii) A reduction in the fiscal deficit? (iii) Lower government borrowing requirements? (iv) Better expenditure control? (v) Reduced debt-service pressure? (vi) A stronger primary balance? (vii) Better management of public investment? (viii) Or a combination of all these?
Sri Lanka needs to spell this out.
The IMF’s current programme itself places considerable emphasis on restoring fiscal and debt sustainability while rebuilding external buffers. It also stresses sustained revenue mobilisation and continued attention to external resilience.
The important point is that fiscal policy and monetary policy should not operate as two unrelated policy islands.
A large fiscal imbalance can influence aggregate demand, inflation, domestic interest rates, government borrowing and the external account. Conversely, stronger fiscal performance can reduce macroeconomic pressure and make the task of rebuilding reserves easier.
Therefore, reserve management is not merely a technical investment-management issue. It sits within the broader macroeconomic policy framework.
6. The 2023 Central Bank Act Already Provides the Institutional Answer
This is where Sri Lanka has an important institutional advantage.
The Central Bank of Sri Lanka Act, No. 16 of 2023 strengthened the independence of the Central Bank and established a Monetary Policy Board responsible for monetary policy. At the same time, the Act created a Coordination Council under Section 83 to facilitate coordination between Government fiscal policy and the monetary and financial stability policies of the Central Bank.
The CBSL has itself described the purpose of this Council very clearly: to facilitate deliberations on how government and Central Bank policies may affect one another and to exchange views on macroeconomic developments, the outlook and risks. It meets quarterly.
This is precisely the principle of policy consistency that Sri Lanka needs.
My earlier proposal for a Government Policy Coordination Committee should therefore be understood not as an argument for creating another institution, but as an argument for strengthening and fully utilising the existing Coordination Council established by the 2023 Act.
The institutional architecture already exists. The challenge is to make it genuinely effective.
7. Coordination Does Not Mean Loss of Central-Bank Independence
This distinction is critical.
Coordination is not control.
The Treasury should not determine monetary policy. The Central Bank should not determine fiscal policy.
The Monetary Policy Board must remain responsible for monetary policy in pursuit of domestic price stability. The Government must remain responsible for fiscal policy.
Yet the two cannot afford to operate without understanding each other’s actions.
Indeed, the CBSL itself has acknowledged that policy coordination is particularly important under the flexible inflation-targeting framework because fiscal actions and supply-side developments can affect inflation in ways that cannot always be addressed through monetary policy alone.
The objective should therefore be institutional coordination without institutional subordination.
That is the spirit in which the Coordination Council should operate.
8. The Governor’s Conference Speech Could Go One Step Further
The Reserve Management Conference 2026 brought together central bankers, reserve managers, sovereign asset managers, international financial institutions and investment professionals. Its agenda covered geopolitical fragmentation, asset allocation, currency composition, gold and alternative assets, technology and AI, ESG and the use of external managers.
This was therefore an ideal opportunity not merely to repeat the established principles of reserve management, but to pose a distinctly Sri Lankan research and policy question:
What is the appropriate reserve adequacy framework for Sri Lanka after the 2022 crisis?
That question could lead to a major policy contribution.
Sri Lanka could invite the participating institutions and experts to develop a common analytical framework incorporating the country’s particular vulnerabilities. Such a framework could examine stress scenarios, debt-service pressures, import requirements, capital flows, exchange-rate movements and the interaction between reserves and monetary conditions.
The outcome would be more valuable than simply setting a target for the size of reserves.
It would establish why that target is appropriate, what risks it covers, and under what circumstances it should change.
9. The Governor’s Public Communication: Substance Matters More Than Frequency
The Governor must communicate with the public. This is an essential part of modern central banking, particularly under a flexible inflation-targeting regime.
The Central Bank itself recognises the importance of monetary-policy communication to economic stakeholders and the public.
My concern, therefore, is not that the Governor communicates frequently.
The concern is whether the subject matter of public communication always remains sufficiently connected to the Central Bank’s statutory responsibilities.
A Governor’s words carry considerable economic weight. Investors, businesses, households, financial institutions and politicians may interpret his statements as signals about future monetary or economic policy.
For that reason, the Governor’s strongest public contribution is likely to come when he explains clearly the Central Bank’s mandate, monetary-policy decisions, reserve-management strategy and assessment of macroeconomic risks.
Where issues cross into fiscal and broader government policy, it is preferable to emphasise the need for institutional coordination rather than appear to speak on behalf of the fiscal authority.
This is not a criticism of an individual Governor. It is a principle of sound central-bank governance.
10. From Reserve Building to a National Macroeconomic Strategy
Sri Lanka has come a long way since the crisis of 2022.
The country’s reserves have been rebuilt substantially, fiscal reforms have progressed, and the IMF programme has emphasised the simultaneous objectives of fiscal sustainability, price stability and rebuilding external buffers.
The next stage should be more ambitious.
Sri Lanka needs an integrated macroeconomic framework in which fiscal policy, monetary policy, exchange-rate policy, public debt management and reserve management reinforce rather than undermine one another.
This does not require a return to the old model in which the Central Bank and Government became institutionally intertwined.
Quite the opposite.
The 2023 Act provides a better model: independent institutions, clear mandates and structured coordination.
The Central Bank must remain independent. The Treasury must remain responsible for fiscal policy. Public debt management must increasingly be conducted through the institutional arrangements established under the Public Debt Management Act. But the policy implications of decisions taken by these institutions must be discussed systematically.
That is how consistency can be achieved without sacrificing autonomy.
Conclusion: Build Reserves, But Build the Policy Framework Too
The Governor is right: Sri Lanka cannot build foreign reserves at any cost.
But the country now needs to go one step further.
The objective should not simply be to accumulate more dollars. The objective should be to determine (i) how much reserve protection Sri Lanka actually needs, (ii) what risks those reserves must cover, (iii) how rapidly they should be accumulated, and (iv) how reserve accumulation interacts with fiscal and monetary policy.
That requires a transparent and measurable reserve adequacy framework specifically designed for the post-2022 Sri Lankan economy.
It also requires strong policy coordination.
Fortunately, Sri Lanka does not have to invent the institutional mechanism. Section 83 of the Central Bank of Sri Lanka Act, No. 16 of 2023, has already established the Coordination Council for precisely this purpose.
The priority should therefore be to make that Council more substantive, more analytical and more forward-looking—so that the Treasury and Central Bank can exchange information, assess risks and ensure that their policies are mutually consistent while preserving their separate mandates.
That would give real meaning to the Governor’s important message.
Reserve building should not be a race for a number. It should be part of a coherent national macroeconomic strategy.
Sri Lanka has already learned the cost of inconsistency. The next lesson should be how to achieve coordination without compromising institutional independence.
That is the real challenge—and the real opportunity—after the crisis of 2022.
(The author served as the Special Adviser to the Office of the President of Namibia from 2006 to 2012 and was a senior consultant with the UNDP for 20 years, and a Senior Economist with the Central Bank of Sri Lanka (1972-1992). He can be reached at asoka.seneviratne@gmail.com)