Sri Lanka recorded a balance of payments (BOP) deficit of $22.1 million in December 2024, marking the first deficit after consistent surpluses throughout the year, according to official data. This shift comes as the country faces increased private credit expansion and monetary policy adjustments.
The surplus for 2024 stood at $2.89 billion, largely supported by deflationary policies. However, in the last quarter, inflationary open market operations (OMOs) disrupted stability, triggering higher private credit, increased imports, and foreign reserve losses. December imports surged to $1.9 billion, despite continued restrictions on vehicle imports.
Sri Lanka’s foreign reserves declined for the third consecutive month in January 2025, reaching $6.07 billion, a $57 million drop from December.
This follows warnings from analysts in October about the consequences of money printing to suppress interest rates.
The Central Bank’s reliance on an “abundant reserve system”—injecting excess liquidity to maintain a single policy rate—has contributed to external pressures. Analysts caution that maintaining stability requires a scarce reserve approach, allowing interest rates to rise slightly to prevent unsustainable credit growth and currency depreciation.
With budget support loans from multilateral lenders and ongoing debt restructuring, Sri Lanka faces critical decisions on monetary policy to restore stability, rebuild reserves, and meet IMF reserve targets. By February 2025, excess liquidity had been extinguished, signaling potential improvements ahead.
Economic experts emphasize the need for tight monetary control to sustain external stability and prevent further crises.
