Build reserves while times are good, Central Bank Governor urges

Sri Lanka must build its foreign reserve buffers during favourable periods rather than wait for another crisis, Central Bank Governor Dr. Nandalal Weerasinghe has said, warning that growing geopolitical uncertainty has made reserve management increasingly complex.

Speaking at the inaugural Reserve Management Conference 2026 in Colombo, Weerasinghe said the country’s 2022 economic crisis demonstrated the consequences of allowing external buffers to fall to critically low levels.

“When reserves become critically low, the consequences extend far beyond the central bank’s balance sheet,” he said, noting that imports become constrained, debt servicing becomes difficult, exchange-rate pressures intensify and confidence in the economy can deteriorate.

Weerasinghe said Sri Lanka had since undertaken macroeconomic stabilisation and structural reforms, with the external sector strengthening substantially compared with 2022 and 2023. However, he cautioned that building reserves was not a linear process and that external shocks could rapidly deplete accumulated buffers.

“We cannot accumulate reserves at any cost,” he said, warning that excessive market intervention could distort signals, excessive monetary expansion could fuel inflation and excessive reliance on foreign borrowing could create future debt-servicing obligations.

He said the most sustainable strategy was to build an economy that naturally generates and retains foreign exchange while maintaining overall economic stability.

The Governor also highlighted the impact of geopolitical tensions on Sri Lanka, particularly as an energy-importing economy. A sharp rise in global oil prices could quickly increase the import bill, while geopolitical tensions could simultaneously affect tourism, remittances and other foreign exchange inflows.

Addressing changes in global reserve management, Weerasinghe said the US dollar remained dominant due to the unmatched depth and liquidity of dollar financial markets, although central banks were increasingly examining risks associated with excessive concentration in a single currency or jurisdiction.

He said diversification had a role but should not become an objective in itself, stressing that liquidity must remain paramount when reserves may need to be deployed during a crisis.

Weerasinghe also said artificial intelligence could strengthen reserve management through improved forecasting, market monitoring and scenario analysis, but warned that it should support rather than replace human judgement.

“The responsibility for official reserves must remain with people,” he said.

The Governor said one of the most important lessons from recent crises was that countries must accumulate buffers before they are needed.

“We should build buffers during good times because we know that good times will not last forever. In simple terms, we must build for a rainy day,” he said.

He concluded that sustainable reserve accumulation required sound macroeconomic fundamentals, policy credibility and institutional discipline, adding that there was “no shortcut” to building reserves capable of protecting an economy against future shocks. (Newswire)

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