ECONOMYNEXT – Net foreign assets of Sri Lanka’s central bank have risen to the equivalent of 1,710 million US dollars in August 2025, up from 1,468 million dollars, after a marginal rise in the previous month, official data shows.
Sri Lanka’s central bank’s ability to collect reserves reduced in 2025 during the current portion of the International Monetary Fund program after a requirement to sell down its domestic assets was removed, analysts have pointed out.
Meanwhile, inflationary swaps have also injected liquidity, further reducing the ability to collect reserves, though inflationary open market operations have been paused.
In August 2025 inflationary swaps with domestic banks fell to 3,680 million US dollars from 3,845 million US dollars after a marginal fall in July.
Unwinding a buy-sell swap with the central bank as counterparty leads to a withdrawal of excess liquidity in money markets and the inability to give fresh domestic credit.
Analysts had warned that inflationary swaps, as well as inflationary open market operations will make it difficult to collect reserves and can also lead to forex shortages, bringing a second default closer.
There have been warnings that the current IMF program has a flaw in not having a falling ceiling on domestic assets to drive sustained deflationary policy and the collection of reserves.
The inflationary injections deployed by central banks like in Sri Lanka under IMF technical assistance which keep countries trapped in one program after the other until external default, originally emerged in the 1920, triggering the Great Depression in its wake, as well as the 1960s, analysts say.
“These policies that lead to monetary instability, inflation of prices, asset price bubbles, social unrest and default were originally cooked up by New York Fed chief Norman Strong, Bank of England Governor Montagu Norman,” explains EN’s economic columnist Bellwether.
“They were opposed by Emile Moreau, and ironically some even by then Reichsbank chief Hjalmar Schacht historical records show.”
“Ultimately, when the inevitable consequences of rate cuts and inflationary policy emerge, politicians will be blamed for not carrying out ‘reforms’.
“They will not be able to defend themselves because central bank operating frameworks are poorly understood.”
It is not clear why the inflationary swaps were reduced, but local banks have been financing foreign governments and regional borrowers as global interest rates are generally higher.
Sri Lanka’s rupee has been steadily depreciated in 2025 by the central bank amid record current account surpluses.
According to narratives pushed by inflationist central bankers and the IMF, currency depreciation is a result of current account deficits. (Colombo/Oct14/2025)