Sri Lanka Treasury to buy dollars to settle debt and avoid second default
- CNL Reporter
- June 30, 2025
- Banking and Financial, Political
- dollars
- 0 Comments
Now that Sri Lanka’s central bank has made a pro-cyclical rate cut as private credit is recovering reminiscent of its actions in 2015, 2018 and second half of 2019, the time has come for the government to start taking counter action to reduce the risk of the next default.
The single policy rate and the de facto abandoning of the scarce regime is a key risk to debt repayment or expecting the central bank to provide dollars for debt repayment. Unlike in the past, the IMF loan is now also the responsibility of the Treasury.
Several measures can be taken to easily de-risk the country and elected governments from flexible inflation targeting and potential output targeting.
One is setting up a dollar trading or purchasing mechanism at the Treasury. Others include dropping domestic ‘buffers’, transferring central bank profits to the Treasury in dollar and not through the creation of new rupees.
An important point to keep in mind is that Sri Lanka defaulted due to extreme macro-economic policy involving severe rate cuts and tax cuts not to mention car import bans which slashed tax revenues and triggered more money printing to maintain the reduced policy rates.
