Central Bank Swaps Rise as FX Reserves Dip in Sri Lanka

Sri Lanka’s central bank saw a decline in net foreign exchange reserves ahead of Cyclone Ditwah, while foreign exchange swap liabilities increased, official data show.

Net reserves, excluding swaps, fell to US$2.298 billion in November 2025, down from US$2.533 billion in October, before the cyclone and prior to a new International Monetary Fund (IMF) emergency loan. Net reserves stood at US$2.482 billion in January 2025, while gross reserves remained largely unchanged.

Central bank swap liabilities rose during the year. Total swaps, including a non-inflationary arrangement with the People’s Bank of China, amounted to US$3.548 billion in January 2025, increasing to US$3.794 billion by November, largely driven by buy-sell swaps.

Buy-sell swaps are considered inflationary as they monetise commercial banks’ dollar balances in exchange for newly created local currency, expanding credit, boosting imports, and transferring foreign exchange risk to the central bank.

While the IMF programme has imposed limits on sovereign guarantees, analysts note that no clear cap exists on the foreign exchange risk the central bank can assume. During the previous crisis, the central bank recorded losses of about Rs. 700 billion on swaps, prompting scrutiny from the Parliamentary Committee on Public Finance.

Sri Lanka must rebuild reserves to meet external obligations, including repayments linked to borrowing undertaken to suppress interest rates during the last crisis. Analysts say sustained reserve accumulation requires deflationary policies to withdraw excess liquidity.

In December, the IMF disbursed US$206 million under an emergency facility after Cyclone Ditwah, marking Sri Lanka’s 18th IMF loan.

In 2025, the rupee depreciated from around Rs. 290 to Rs. 310 per US dollar, reflecting ongoing pressures from monetary policy and foreign exchange operations.