Sri Lanka’s excess rupee reserves have reached 230 billion rupees, approaching levels seen before the 2021 currency crisis. These reserves are above the required statutory ratio and are primarily a result of the central bank’s actions during the pandemic, which included printing money through direct market operations. While private credit is beginning to increase, it is not yet matched by cash inflows, raising concerns that the excess liquidity could put pressure on the currency.
The central bank has been injecting additional liquidity, approximately 30 billion rupees overnight and 40-50 billion rupees in term money, to maintain excess liquidity. Critics argue that the shift to a “single policy rate” system could lead to mismanagement of liquidity, which might destabilize the economy further.
Though a surplus balance of payments (BOP) is contributing to excess liquidity, it may lead to inflationary pressures and higher import costs due to trade restrictions. Seasonal cash drains in December may temporarily alleviate liquidity pressure, but BOP issues typically resurface in February. Analysts warn that rate cuts, especially those implemented during open market operations, could exacerbate the situation, as seen in previous currency crises.
Foreign banks, cautious in their lending, contribute to the liquidity surplus but avoid relying on central bank financing, which can lead to foreign exchange shortages. The central bank’s current operational structure is seen as flawed, with limited economic freedoms and regulatory restrictions hindering a more effective response to the challenges.
