Sri Lanka’s economy has apparently moved a considerable distance from the crisis that culminated in sovereign default in April 2022. Inflation has fallen sharply from its crisis-era highs, economic growth has seemingly returned and foreign exchange reserves have been rebuilt.
Yet beneath those improvements, questions are growing over how resilient that recovery really is.
The concerns centre on Sri Lanka’s foreign exchange position, its dependence on continued inflows and the extent to which headline reserve figures reflect dollars that are genuinely available to meet future external obligations.
Gross official reserves stood at US$6.45 billion at the end of June, according to the Central Bank of Sri Lanka (CBSL), after falling 6.2 percent during the month amid foreign debt service payments. The figure was still substantially higher than the reserves available during the 2022 crisis.
But parliamentarian Ravi Karunanayake this week questioned whether gross reserves alone provide an adequate picture of Sri Lanka’s external position.
Karunanayake has challenged the government and CBSL over the treatment of foreign exchange swaps and other liabilities, arguing that the headline reserve figure does not necessarily represent the amount of foreign currency immediately available to the country.
His intervention has drawn attention to a distinction that is central to Sri Lanka’s recovery: the difference between gross reserves and net international reserves.
The International Monetary Fund’s programme for Sri Lanka uses net international reserves as one of its key measures of external strength. IMF documents have also identified foreign exchange swaps and other liabilities when assessing the country’s reserve position. The IMF’s latest review noted that Sri Lanka’s reserves remained only around halfway towards its programme targets, underlining the continuing need to rebuild external buffers.
A recovery dependent on continued liquidity
An economist who reviewed the recent reserve figures for the Tamil Guardian argued that the headline recovery risks obscuring a more fragile position.
He described Sri Lanka’s reserve recovery as increasingly resembling “rented liquidity rather than rebuilt resilience” — a position supported in part by foreign exchange liabilities and dependent on counterparties remaining willing to roll those obligations over.
The description is not a claim that Sri Lanka’s published reserves are fictitious. Rather, it highlights the difference between foreign exchange accumulated through sustained external earnings and liquidity obtained through arrangements that create obligations or depend on continued access to financing.
That distinction matters because Sri Lanka must continue to generate sufficient foreign exchange to pay for essential imports, service debt and rebuild reserves simultaneously.
The country has made some progress on this front. Workers’ remittances have remained strong, tourism has recovered somewhat and the current account has improved dramatically. The IMF has also credited Sri Lanka with rebuilding external buffers and maintaining fiscal and monetary reforms.
But those gains are being tested by a deteriorating external environment.
Oil shock exposes the vulnerability
The renewed pressure became particularly visible this year as the US-Iran conflict drove global energy prices sharply higher.
Sri Lanka is heavily dependent on imported fuel, meaning higher oil prices rapidly translate into a greater demand for foreign exchange. The government introduced fuel price increases, rationing measures and public holidays as it sought to contain the impact of the shock.
The Central Bank raised its policy rate by 100 basis points in May to 8.75%, its first rate increase in more than three years, partly in response pressures on foreign exchange reserves and inflation.
By July, inflation had risen to around 7.3%, well above the Central Bank’s 5% target. CBSL’s Governor Nandalal Weerasinghe subsequently said there was currently no need for another rate increase, while warning that the bank remained prepared to act if inflation deviated from its projections.
The Central Bank expects inflation to return towards its 5% target during the first half of 2027. It is also forecasting economic growth of around 4 to 5% for 2026.
The difficulty is that policymakers are now attempting to achieve several competing objectives at once: keep inflation under control, protect economic growth, prevent excessive rupee depreciation, continue accumulating foreign exchange and meet the conditions of the IMF programme.
The shadow of 2022
While the IMF programme, larger reserves and restructured external debt can seem an improvement on the conditions that prevailed in 2022, the comparison is still unavoidable.
The underlying lesson of 2022 remains relevant: a reserve position can deteriorate rapidly when foreign exchange outflows persist and access to external financing closes.
In 2022, Sri Lanka’s reserves had fallen to roughly US$1.9 billion while debt obligations were several times larger, leaving the country unable to meet its external payments.
The question for now is whether the country’s current buffers are sufficiently real, liquid and durable to withstand another major external shock.
That question becomes more important as the IMF programme moves towards its scheduled conclusion and Sri Lanka seeks to return to international capital markets.
A recovery reliant on protection
The IMF has repeatedly warned that Sri Lanka’s recovery remains exposed to external risks, including geopolitical tensions, trade uncertainty and shocks to the country’s external position. It has stressed the importance of rebuilding both fiscal space and external buffers.
Tourism provides an illustration of both the progress and the vulnerability. Sri Lanka attracted 1.3 million visitors during the first seven months of 2026 and earned around US$1.5 billion from tourism. But arrivals fell sharply during March and April amid the Gulf crisis, while the country has simultaneously faced a surge in energy costs.
For a country whose foreign exchange position depends heavily on tourism, remittances, exports and continued access to external financing, these shocks matter.
Sri Lanka’s reserve target for the end of 2026 is around US$8 billion. Reaching that figure would provide an important additional buffer, but the composition of those reserves will matter as much as the headline total.
A reserve accumulated through sustained current-account surpluses and genuine foreign exchange purchases provides a different form of protection from liquidity that depends on swap arrangements being renewed.
The question raised by Karunanayake’s intervention is therefore not simply how large Sri Lanka’s reserves appear on paper, but how much of that foreign exchange represents a durable buffer against another external shock.
If a substantial share of the reserve position depends on liabilities being rolled over, the country’s apparent recovery remains vulnerable to a change in global financing conditions, a prolonged rise in energy prices or a sudden loss of access to foreign exchange.
The economist who reviewed the figures warned that this leaves open the possibility that Sri Lanka’s apparent reserve recovery could prove considerably less resilient than the headline figures suggest.
