Sri Lanka fails to meet IMF targets after the fourth review

Sri Lanka has failed to meet the foreign reserve indicator target set for it under the International Monetary Fund (IMF) program. This has been primarily caused by strong credit growth and the injection of liquidity into the market through the swap mechanism.

According to the latest staff report published under the International Monetary Fund program, a foreign reserve target of USD 593 million was initially set after the fourth review. This target was later reduced to USD 485 million, but Sri Lanka has only been able to accumulate reserves amounting to USD 426 million.

Due to the Central Bank of Sri Lanka maintaining its domestic asset target at a stable level without change during the prior stage of the program, Sri Lanka has been unable to accumulate the projected net international reserves by the International Monetary Fund. Even after the Fund's last dual review, the Central Bank's domestic asset amount has been fixed at a stable level of LKR 2,510 billion.

When the Central Bank purchases dollars, money printing occurs, which differs from the operations of the Treasury. If the newly created rupees are not withdrawn through the sale of domestic assets, the Central Bank cannot securely maintain the accumulated reserves. However, the Central Bank is only allowed to hold reserves up to an amount equivalent to the coupon payments (interest) received on its portfolio of government bonds and any increase in reserve money.

Economic analysts point out that the Treasury, instead of the Central Bank, should take on the task of accumulating foreign reserves. When the Treasury accumulates reserves, no new money is created, thereby eliminating the Central Bank's ability to print money. This step would also help prevent the depreciation of the local currency by debasing the value of banknotes, as has occurred over the past year.