Friday Sep 11, 2026
Friday Sep 11, 2026
Friday, 11 September 2026 07:03 - - {{hitsCtrl.values.hits}}
CBSL Governor Dr. Nandalal Weerasinghe
By Devan Daniel
Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe yesterday cautioned that reserves cannot be accumulated at any cost, warning that excessive intervention can distort market signals, excessive monetary expansion can stoke inflation, and excessive reliance on external borrowing simply creates future debt-service obligations.
Delivering the opening remarks and keynote address at the inaugural Reserve Management Conference 2026 in Colombo, Dr. Weerasinghe said such measures undermine the very macroeconomic stability that reserves are meant to safeguard.
Sustainable reserve accumulation, he said, must ultimately be supported by sustainable external sector fundamentals, fiscal and monetary credibility, and backing from the broader macroeconomic policy framework. He said this is particularly important for emerging and developing economies, where reserve accumulation cannot be separated from wider policy choices.
The most sustainable strategy, in his view, is not simply to acquire reserves but to build an economy that naturally generates and retains foreign exchange while maintaining overall economic stability.
The Governor described foreign reserves as a country’s first line of defence against external shocks. He stressed they represent the nation’s savings rather than the Government’s resources, carrying, in his words, a very important responsibility for the institutions managing them.
Reserves provide confidence and policy space and enable countries to meet essential external obligations, he said. Their most valuable function, however, is buying time; time for policymakers to respond, for markets to stabilise, and for an economy to adjust without being forced into disorderly, unnecessarily painful corrections.
Dr. Weerasinghe held up Sri Lanka’s 2022 economic crisis as evidence of what happens when external buffers become inadequate. Critically low reserves constrained imports, complicated debt servicing, intensified exchange rate pressure, and stoked inflation, while confidence in the economy deteriorated and the policy space to respond to further shocks became severely constrained.
Since the crisis, he said, Sri Lanka has pursued macroeconomic stabilisation and structural reform, with the external sector strengthening substantially compared to the difficult 2022 to 2023 period. But he cautioned that reserve building is not a linear process, since external shocks can draw down accumulated buffers quickly, a volatility he said has been visible not only in Sri Lanka but across markets with relatively high reserve levels.
He argued that reserve adequacy can no longer be judged by a single conventional indicator such as months of import cover. It should instead be treated as a risk-management framework incorporating short-term external liabilities, debt-service requirements, capital flow volatility, contingent liabilities, exchange rate flexibility, and the probability and scale of potential shocks.
The relevant question, he said, is not how much reserves a country holds today but how resilient, accessible, and quickly mobilised those reserves are against a shock whose timing cannot be predicted. Countries facing a major reserve depletion, as Sri Lanka did, must rebuild with patience and discipline rather than urgency, he added.
Reserve managers today operate in a world shaped by geopolitical fragmentation, strategic competition, trade tensions, sanctions, volatile commodity prices, and unpredictable interest rate cycles, Dr. Weerasinghe said. The international financial system is becoming more fragmented, trade and investment patterns are shifting, and supply chains are being reconfigured.
Geopolitical developments can now be transmitted into financial markets almost instantaneously, he said. A conflict in one part of the world can affect energy prices globally, and a disruption to a major shipping route can affect inflation thousands of kilometres away, illustrating the degree of global interconnectedness reserve managers now face.
A change in monetary policy in a major economy can alter capital flows to emerging markets, while a single geopolitical announcement can move exchange rates, bond yields, and risk premia within minutes, he said. Geopolitical risk, in his assessment, can no longer be treated as external to the investment process; it has become integral to reserve management itself.
This fragmentation raises difficult, no-longer-theoretical questions for reserve managers, he said: whether reserves should stay concentrated in the deepest and most liquid markets or be diversified across jurisdictions, how to balance diversification against liquidity, and how much diversification is beneficial before it starts eroding liquidity and operational efficiency.
On currency composition, the Governor said the US dollar remains dominant in reserve management, with unmatched market depth and liquidity. Reserve managers are, however, right to examine the risks of excessive concentration in any single currency or jurisdiction.
Diversification has a role to play, he said, but should never become an objective in itself. A theoretically diversified portfolio that cannot be liquidated efficiently when markets are under stress offers little practical protection.
The more appropriate question, in his view, is what currency composition best supports the objectives and risk tolerance of a country’s reserves, a decision shaped by trade patterns, external liabilities, intervention needs, market depth, expected returns, and geopolitical exposure. There is, he said, no universal optimal currency composition.
Dr. Weerasinghe returned to the traditional three objectives guiding reserve management— safety, liquidity and return, noting that while these can often be balanced under normal conditions, the trade-offs sharpen considerably during periods of stress. Assets that look attractive in calm markets can behave very differently in a crisis.
A reserve portfolio, he said, is not a conventional investment portfolio like a private sector or commercial banks. The fundamental question is not how much return was earned, but whether the value and availability of reserves were preserved when they were most needed.
Liquidity carries what he called an option value: highly liquid assets may appear costly to hold during quiet periods, but that liquidity becomes extremely valuable once markets come under stress, contributing directly to a country’s overall stability and resilience.
Commodity, energy, and climate shocks deserve close attention, Dr. Weerasinghe said. For an energy-importing country such as Sri Lanka, a sharp rise in global oil prices can quickly increase the import bill, while geopolitical tension can simultaneously weigh on tourism and remittance inflows, a combination that is precisely the type of situation reserves exist to absorb.
Climate-related shocks warrant similar treatment, he said, citing Cyclone Ditwah last year as an example of a natural disaster becoming a full external sector shock affecting agriculture, infrastructure, tourism, imports, and fiscal conditions. Reserve adequacy frameworks, he argued, should increasingly plan for combinations of such shocks occurring together, rather than assessing each risk in isolation.
On gold, the CBSL Governor said the relevant question is not simply whether to buy it, but what role it should play within a reserve portfolio. Gold does not carry the credit risk of a sovereign issuer and has historically served as a store of value, factors he said have renewed central bank interest in the metal and contributed to its price gains in recent years.
Gold does not, however, offer the same liquidity characteristics as cash or highly liquid Government securities, he said. Its appropriate allocation must reflect each central bank’s own objectives, liquidity needs, risk tolerance, and portfolio structure, a principle he said applies equally to newer instruments such as digital assets and tokenised financial instruments. Innovation is important, he said, but should never come at the expense of the fundamental safety and liquidity that official reserves are meant to provide.
Reserve management has always been data-intensive, but the volume, speed, and complexity of information now available is unprecedented, Dr. Weerasinghe said. Real-time market data, automated analytics, advanced risk models, and artificial intelligence (AI) can all strengthen decision-making, helping managers identify patterns, monitor markets, and run scenario analysis.
These tools do not eliminate uncertainty, he cautioned. Models can fail, data can be biased, and algorithms trained on historical experience may not capture risks that emerge from structural change. His guiding principle: such tools should support the judgement of reserve managers, not substitute for it, with responsibility for official reserves remaining with people.
Dr. Weerasinghe set out four principles to guide reserve managers going forward. First, adequacy before optimisation: a reserve portfolio that is too small cannot be made safe simply by chasing higher returns.
Second, diversification should be purposeful rather than pursued for its own sake, based on clearly identified risks and objectives.
Third, geopolitical risk, including jurisdictional, sanctions, settlement, and counterparty risk, must be integrated into investment decisions rather than assessed solely through traditional financial metrics.
Fourth, reserve management must stay dynamic, since interest rate cycles, currencies, trade patterns, geopolitical relationships, and technology all keep changing, meaning today’s optimal portfolio may not be tomorrow’s.
Perhaps the most important lesson of recent years, Dr. Weerasinghe said, is that buffers must be built before they are needed. Reserve accumulation is easiest when confidence is strong, capital is flowing, and exports are growing, precisely the conditions in which institutions are tempted to assume good times will continue indefinitely.
That, he said, is why institutional discipline matters: reserves should be built in good times because good times do not last; in simple terms, building for a rainy day.
He closed by describing international cooperation as itself a form of resilience, recalling that Sri Lanka received support, particularly from the Reserve Bank of India, during its period of stress. Access to information, communication, and mutual understanding between central banks become especially valuable as the global financial environment grows more challenging, he said, urging delegates to use the two-day conference for candid exchange on what has worked and what has not, rather than formal presentations alone.
He left delegates with three closing messages: that reserve managers must broaden their definition of risk given how fundamentally geopolitical uncertainty has changed their operating environment; that building reserves is a long-term process requiring sound fundamentals, policy credibility, and institutional discipline, with no shortcut to sustainable accumulation; and that resilience cannot be created by any single asset, currency, model, or strategy, but only through adequate buffers, prudent diversification, strong liquidity, sound institutions, flexible policy, and international cooperation.
Sri Lanka’s official reserve assets fell 6.9%, or $ 431 million, in June, to $ 6.45 billion from $ 6.88 billion at end-May, according to CBSL data. Foreign currency reserves drove the decline, falling $ 407 million to $ 6.25 billion, while gold eased to $ 191 million from $ 216 million.
The CBSL estimated short-term net foreign currency outflows at $ 2.15 billion, with aggregate short forward and futures positions against the rupee, including swap forward legs, at $ 4.04 billion at end-June, though much of this is expected to be rolled over. The International Monetary Fund (IMF) subsequently revised Sri Lanka’s end-2026 Net International Reserves (NIR) target down to $ 778 million from $ 944 million, with NIR, usable reserves net of short-term liabilities and swap obligations, estimated to have turned negative.
The CBSL has since stepped up buying to rebuild reserves and meet the revised target, purchasing a record $ 579 million in August, the highest since January 2025, above prior highs of $ 461 million in February 2026 and $ 356 million in August 2025. Net purchases for the first eight months of 2026 topped $ 1.48 billion, against $ 2 billion for all of 2025.
The scale marks a departure from past balance of payments crises, when the CBSL was typically a net seller, drawing down reserves to defend the rupee, an approach that left reserves depleted and the currency under renewed pressure once intervention capacity ran out. Buying was uneven through the year: the CBSL sold $ 12.9 million and $ 211.3 million in April and May, respectively, as the rupee fell sharply, before buying resumed in June ($ 70.5 million), then July ($ 348.6 million) and the August record.
The rupee’s year-to-date depreciation widened from a marginal 0.2% appreciation at end-February to 2.9% by end-April as the Middle East conflict escalated, then to a 7.9% peak by end-June, before easing to 5.5% by end-August; it had depreciated 5.6% over all of 2025. Continued CBSL buying implies further depreciation pressure ahead, with the IMF saying the exchange rate should be allowed to absorb external shocks rather than be controlled.
- Pic by Upul Abayasekara
