Sri Lanka may not be able to reach a Adequacy of Reserves Assessment ratio of 100% by end-2026 – which assesses the country's ability to repay debt – but it should try to approximate the target set by the International Monetary Fund at the signing of the Extended Fund Facility, despite its less than favorable sovereign credit rating, Committee on Public Finance Chairperson Harsha de Silva said on Saturday (29), speaking to media.
“Let's say we have $ 6.5 billion reserves and we need to reach $ 12 billion. We won't be able to do that before the end of next year. Therefore I'm not of the opinion that we can keep the ARA (Adequacy of Reserves Assessment) metric at 100%. We should see how much we can approximate it. Can we reach 93%, 95%, 85% or 80% – based on these approximations, the ability to repay debt will shift.”
Referring to the signing of the Extended Fund Facility Agreement with the IMF in 2023, he added: “When we had signed the IMF document, it was with the logic that the ARA metric would be at 100% – and that Sri Lanka would be able to accumulate reserves of $ 13 billion.”
According to the IMF’s expectations published with the conclusion of the Fifth and Sixth review in May, the multilateral outlined that by the end of the year, Sri Lanka is to have $ 8.6 b in gross official reserves, a target revised down from its projected $ 11 billion during the previous review. Further, it outlined that Sri Lanka’s end-programme target in 2028, is a reserve position of $ 13.9 billion.
As of latest data released, Sri Lanka’s Gross official reserves stand at $ 6.5 billion. Reserves had reached a post-crisis high of $ 6.87 billion in May, before contracting shortly afterwards. Under ongoing debt servicing obligations reserves held steady at $ 6.1 billion in July, before gradually rising to the existing position.
De Silva warned that the optimistic stance maintained on reaching the IMF target overlooked that the ARA calculates the reserve position after deducting short-term liabilities like foreign currency swaps with foreign banks, and crucially; currency swaps with domestic banks.
“If we take Gross reserves, it is only a forecast. The important thing here is Net International Reserves. This would mean removing the foreign currency swaps; or short term liabilities.”
“What is left after the unwinding of swaps is what the Central Bank measures as Net International Reserves. However, when the IMF calculates it, they also remove foreign currency swaps made with domestic banks.”
Sri Lanka’s net international reserves (NIR) reached $ 4.28 billion by the end-2025, which is the latest known position of NIR.
“Therefore the $ 6 billion is to see a significant amount deducted,” de Silva said referring to Gross official reserves.
De Silva added that the end-2028 reserve expectation set by the IMF includes the possibility of Sri Lanka being able to borrow at least $ 1 billion from ISBs.
However, with existing CCC+/C by S&P Global and Caa1 with a stable outlook from Moody's, he warned that Sri Lanka may not be so confident in re-entering the market with the prospect of borrowing said sum.
“It is with foreign credit rating position that we approach the International Sovereign Bonds (ISB) market. To access the market we need a better rating.”