Sri Lanka’s recent gains in stabilising prices and the rupee are the result of cautious monetary policy, not “uncontrolled money printing,” International Monetary Fund Mission Chief for Sri Lanka Evan Papageorgiou said on Thursday, framing the currency as the country’s “first line of defence” against external shocks rather than a victim of them.
Inflation, which soared to around 60-70 percent at the height of the 2022 crisis, has now dropped to low single digits, with only a temporary uptick last month tied to the Middle East conflict, Papageorgiou said. He stressed that the Central Bank of Sri Lanka has stopped financing the government’s budget deficit by creating new money under the IMF-supported programme and that policy interest rates are being kept consistent with the central bank’s 5 percent inflation target. The Fund sees no signs of “destabilising monetary expansion” at present, he said, meaning the central bank is not pumping excessive liquidity into the economy.
On the exchange rate, Papageorgiou said the rupee has been allowed more flexibility and is working as a “shock absorber” — letting the currency move in response to global shocks rather than tightly controlling it, so that some of the pressure from events like the Middle East war is taken by the exchange rate instead of by reserves or by sudden policy reversals. He underlined the need for a “prudent, rules-based” approach to both monetary policy and the exchange rate.
Foreign reserves continue to rebuild, although the pace has slowed recently because the central bank has had to step in to smooth out excessive volatility linked to the Middle East conflict, he said. Even so, the overall direction of policy remained in line with what the IMF and the authorities have agreed, and he described the current monetary stance as “broadly appropriate,” with inflation projected to stay around the 5 percent target this year and over the medium term.
Papageorgiou said the rupee should act as the “first line of defence” against external shocks, especially when the country is hit by real economic shocks such as higher global oil prices. In such cases some adjustment has to come through the “real sector” and the currency, rather than trying to fix the exchange rate and risk bigger problems later. He called the current approach of letting the rupee move while focusing on stability and inflation control “an appropriate response” to the challenges Sri Lanka is facing.
The remarks came after the IMF Executive Board on Wednesday cleared Sri Lanka’s combined fifth and sixth EFF reviews, releasing about US$695 million and taking total disbursements to roughly US$2.4 billion. The post-approval framing builds on Papageorgiou’s pre-decision assessment that the country’s reform framework remained stronger than the snapshot data suggested. It also pushes back, at the staff level, against a politically charged debate in Colombo where critics have argued the rupee’s recent slide and CBSL’s forward-dollar intervention near Rs.380-400 reflect a return to monetisation. Authorities raised the policy rate to 8.75 percent in late May to anchor the move, while Deputy Finance Minister Anil Jayantha and CBSL Governor Nandalal Weerasinghe have separately said the slide reflects an external oil shock rather than a domestic policy failure.
Update — 31 May: In a follow-up briefing reported by EconomyNext, Papageorgiou defended the inter-agency arrangement under which the Treasury does not buy its own dollars, leaving foreign-exchange operations to the central bank. “The reason is that the central bank is the intermediary of financial flows and because they have close contact with the financial markets, treasury doesn’t deal with foreign exchange issues,” he told reporters after the Executive Board reviews. “This is just a normal process. So, there’s nothing interesting or particularly strange about this. This is the arrangement for many other countries as well.” Critics have argued the Ministry of Finance has been directing CBSL to purchase dollars to service government debt rather than letting the market clear — a framing the mission chief rejected as standard sovereign debt management.
