Official foreign reserves drop by over 6% in June amid external economic pressures

Sri Lanka's official foreign currency reserves contracted by 6.2 per cent over the course of June 2026, dropping to USD 6,450 million from the USD 6,873 million recorded at the end of the previous month.

This decline occurred even as the monetary authority purchased a net total of USD 70.5 million from the market during June.

This follows a highly turbulent period in May when the rupee faced severe downward pressure due to an unusually high import bill for fuel triggered by Middle Eastern escalation, alongside a persistent demand for dollars to purchase new vehicles.

The central bank had previously responded to this heavy currency depreciation by raising its Overnight Policy Rate in May.

The dip in reserves signals renewed pressure on the island nation's external financial position as it navigates its post 2022 economic recovery.

Despite the recent drop, the Central Bank of Sri Lanka has net bought 556.4 million US dollars in the first half of 2026, following a substantial net purchase of USD 2 billion last year.

Aggressive reserve building remains a critical priority for policymakers to meet macroeconomic stability targets agreed upon under the International Monetary Fund's USD 3 billion Extended Fund Facility (EFF), and to ensure adequate funds are available to repay multilateral and bilateral loans before sovereign debt repayments resume in April 2028.

Financial analysts warn that a sustained erosion of foreign reserves could complicate compliance with international performance criteria and potentially delay subsequent tranches of funding, which are essential for maintaining creditor confidence.

While the country has achieved significant progress by restructuring its commercial and bilateral debts to exit sovereign default, the current drawdown highlights the fragile nature of the recovery.

Experts note that policymakers must now focus sharply on expanding export earnings, drawing in foreign direct investment, and maintaining prudent fiscal management to reverse the June decline and preserve economic stability.