Sri Lanka needs to rebuild adequate foreign-exchange reserve buffers before external shocks occur, but reserve accumulation cannot be pursued at any cost, Central Bank Governor Dr. Nandalal Weerasinghe has said.
Speaking at the Reserve Management Conference 2026 in Colombo, the Governor described foreign reserves as a country's first line of defence against external shocks.
Lessons from 2022
Weerasinghe said depleted reserves during Sri Lanka's 2022 economic crisis reduced the country's ability to finance imports, contributed to inflationary pressure and left the economy with little protection against severe external stress.
Although Sri Lanka's external position has improved since 2023, he said reserve rebuilding is not necessarily a continuous or linear process because external shocks can rapidly weaken accumulated buffers.
“Not at any cost”
The Governor warned against building reserves through methods that create new vulnerabilities.
He said:
- excessive intervention can distort market price signals;
- monetary financing can fuel inflation;
- heavy commercial borrowing creates future repayment obligations.
A sustainable reserve strategy, he argued, depends on an economy that can generate and retain foreign exchange naturally.
Measuring reserve adequacy
Weerasinghe also said reserve adequacy should not be judged solely by months of import cover.
Other considerations include:
- debt-servicing obligations;
- volatile capital flows;
- external financial shocks;
- climate-related risks.
He also cautioned that diversification of reserve assets should not undermine liquidity.
Context
The Central Bank's Reserve Management Conference 2026 began in Colombo on 10 September, bringing together central-bank officials and reserve-management specialists.
The Governor delivered the opening keynote address.
The remarks were a policy speech, not an announcement of a new reserve target, exchange-rate policy or interest-rate decision.