IMF Revises Sri Lanka's Reserve Outlook For 20252026

(MENAFN- Colombo Gazette) The International Monetary Fund has downgraded its projections for Sri Lanka's foreign reserve levels for 2025 and 2026, according to a country report tied to the emergency loan program. Analysts had earlier cautioned that aggressive interest rate cuts and rapid private credit growth could limit the Central Bank's ability to build reserves.

Net International Reserves (NIR), previously forecast to rise from USD 1,493 million in 2024 to USD 2,729 million by end-2025, are now expected to increase only to around USD 2,159 million. While reserves would still grow by USD 666 million, this is significantly below the earlier anticipated increase of USD 1,236 million. The IMF program target for end-December stands at USD 448 million.

Economists have repeatedly warned that reducing rates based mainly on past inflation trends, without adequately restraining domestic credit, weakens the capacity to purchase foreign currency. They also note that the current IMF program lacks a downward-sloping ceiling on net credit to government, a key deflationary measure that could otherwise help retain reserves.

Analysts further argue that efforts to accumulate dollars without sufficient tightening risk triggering currency depreciation, even in the absence of an outright balance-of-payments deficit, a pattern seen during Sri Lanka's previous IMF program, which faltered by 2019 amid missed targets, waivers, and rising prices.

Sri Lanka was also struck by Cyclone Ditwah in late December, though analysts noted there was still potential for the central bank to buy more dollars during the month. Over 2025, some reserve accumulation has helped the bank repay its own reserve-related liabilities, improving net reserves.

However, experts warn that leaving excess liquidity in money markets until it fuels imports ultimately undermines debt-repayment capacity, particularly if the Treasury neither purchases dollars nor collects sufficient foreign-currency revenue. Some analysts have proposed granting the Treasury greater independence, including the ability to levy dollar-denominated taxes and directly buy foreign currency to service debt.

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