The Central Bank of Sri Lanka ended 2024 by purchasing the largest amount of foreign exchange from the domestic banking system for a single year in an effort to rebuild foreign exchange reserves that had fallen to a record low in 2022.

Continuing its net purchases, the Central Bank purchased foreign exchange worth US$231.3 million from the domestic banking system in December 2024 and sold US$22.5 million during the month, bringing net purchases for the month to US$208.8 million. This marked a decline from net purchases of US$327.0 million in November but was sharply higher than net purchases of US$113.0 million in the same month a year ago.

This brought the total net foreign currency purchases for 2024 to US$2,845.8 million, up significantly from the US$1,896.0 million purchased on a net basis in 2023, limiting net foreign currency withdrawals for two years.

Although the year-end position has not yet been announced, these continued foreign currency purchases from the banking system enabled the Central Bank to rebuild official reserve assets from US$4,400.0 million at the end of November 2024 to US$6,451.0 million at the end of December 2023. .

However, this includes the approximately US$1,400.0 million yuan-denominated SWAP facility with the People’s Bank of China.

Strong inflows from both remittances from Sri Lankans working abroad and robust earnings from tourism and exports have enabled the banking system to continue accumulating foreign currency.

This came amid Sri Lanka’s suspension of most of its foreign exchange repayments since April 2022, which also helped rebuild reserves as the country had foreign exchange debt service obligations worth an average of about $6.0 billion per year at the time.
All types of debt have now been restructured on largely favorable terms for Sri Lanka, with a portion of its debt being written off from its repayment requirements in a so-called haircut, along with maturity extensions and modest coupon reductions.

Rather than adequately covering 100 percent of short-term liabilities, the Central Bank of Sri Lanka expects a reserve of $10.0 billion to adequately cover the repayment of foreign debt of $4.0 billion to $5.0 billion due over the next 12 months.

Short-term liability reserve coverage is a measure of the strength and adequacy of a country’s reserves in current times, while its import coverage in months is a traditional measure of reserve adequacy.

Sri Lanka’s current reserves now cover 4 months of imports, which is about US$ 1.5 billion.