Sri Lanka must focus on exchange rate flexibility over reserve targeting within policy, as reserves should be viewed as an outcome rather than the policy itself, while exchange rate flexibility determines adaptability to shocks, IMF Mission Chief for Sri Lanka Evan Papageorgiou said, speaking in an interview with the Central Bank of Sri Lanka, published yesterday (29).
“The reserve shouldn’t be the policy. Reserve is the outcome of what you’re trying to achieve. The policy should be exchange rate flexibility,” Papageorgiou said.
He added that the currency’s ability to absorb the shock should buffer the impact it has on the domestic economy, as when the exchange rate fails to adjust, the Central Bank is forced to sell foreign reserves to absorb excess demand for foreign currency, and reserves are depleted.
Papageorgiou’s comments echoed the statement made by the IMF on the seventh EFF review last week; wherein greater exchange rate flexibility was raised as key to absorbing shocks and supporting reserve accumulation.
Sri Lanka’s gross official reserves reached $ 6.9 billion at the end-August 2026. In its EFF agreement with the IMF, it is projected to reach a reserve target of $ 8.6 billion by end-2026.
Committee on Public Finance Chairperson Harsha de Silva, among other critics of the programme, has indicated the possibility that the target may not be reached, as a significant portion of the reserves contains foreign and domestic currency swaps.
Sri Lanka’s current $ 8.6 b gross official reserves target under the programme had been revised down from a previously projected $ 11 billion. IMF projections outline a medium-term reserve position path aiming toward roughly $ 13.9 billion for Sri Lanka by 2028.
Meanwhile, Sri Lanka’s national target for gross foreign exchange reserves by 2028 is $ 15 billion.
Fitch Ratings, in its statement on the upgrade of Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating to ‘B-’ from ‘CCC+’ with a Stable Outlook on 22 September, specifically highlighted Sri Lanka’s improved revenue mobilisation in 2025. Government revenue reached 16.7% of GDP in 2025, exceeding the IMF target.
However, the ratings agency cautioned that debt and debt-servicing burdens remain high as reserve buffers stay modest.
Papageorgiou, in the CBSL interview noted that Sri Lanka must focus on the next phase of its journey on building buffers, which is focusing on reforms to take it through a transformation phase, from its current stability phase.
“So now that it’s a multifaceted approach, many things need to work together: maintaining the fiscal stability that I mentioned, monetary policy needs to work, and monetary stability needs to remain, financial stability obviously is very important.”
“You know, an ongoing set of reforms that needs to be put in place to change the growth model of this country. You know, there’s a big impetus towards trying to improve a little bit where Sri Lanka can have some competitive advantages that by all means should be encouraged.”
“New areas of development need to be opened, breaking down some of these tariff and non-tariff barriers to allow for more competition. These big companies, domestic companies that tend to be a little bit more insulated from external competition, also need to be addressed.”