Economic imbalance caused by excessive vehicle imports last year - Central Bank Governor explains

The Central Bank of Sri Lanka states that Sri Lanka's external sector faced significant challenges last year due to changes in global trade policies and escalating geopolitical tensions, with a key reason being a higher-than-expected increase in vehicle imports. This situation arose with the sudden release of pent-up demand for vehicle imports, which had been suspended for a long time, and was further exacerbated by false rumors circulating that vehicle import restrictions would be reimposed.

These developments were able to exert significant pressure on foreign exchange liquidity and the value of the Rupee.

Presenting the 'Policy Agenda for 2026 and Beyond', Central Bank Governor Dr. Nandalal Weerasinghe stated that according to forecasts made before Cyclone Ditwah, inflation would gradually increase in 2026 and reach the expected targets by the second half of the year. While there are risks of inflation rising or falling due to the destruction caused by the cyclone, and the destruction of supply chains and infrastructure could hinder economic growth, reconstruction efforts and associated expenses are expected to positively impact economic growth. Nevertheless, the Central Bank expects an economic growth of between 4 and 5 percent in 2026, maintaining the growth rate observed over the past two years.

The Central Bank believes that the economy has the ability to recover from this destruction faster than in the past, as strong reserves have been built across key economic sectors such as fiscal, external, and monetary. The Governor also pointed out that, like many other countries in the world, Sri Lanka's propensity to face extreme weather events has increased, and central banks have limited ability to control inflation in the face of such supply-side shocks. Therefore, there is an urgent need to develop disaster preparedness and resilience at the national level.

Despite challenges such as government foreign debt servicing and high demand for vehicle imports, the gross official reserve level was maintained between US$ 6.0 - 6.3 billion for most of the year. By the end of 2025, it exceeded US$ 6.8 billion, which is the highest reserve level recorded since the economic crisis. In addition to funds received from multilateral institutions, the Central Bank's net purchase of approximately US$ 2.0 billion in foreign exchange from the domestic foreign exchange market has been a major contributor to this growth. The Central Bank remains committed to building reserves by purchasing dollars from the market while allowing for exchange rate flexibility.