Central Bank Governor Nandalal Weerasinghe says Sri Lanka has no immediate need to sell restructured bonds, as new monetary tools can manage liquidity. Here’s what it means for markets and economic stability.
Sri Lanka’s central bank currently sees no need to sell down its portfolio of restructured government bonds, and if necessary, new monetary policy tools can be introduced to manage liquidity, Central Bank Governor Nandalal Weerasinghe said.
The governor had previously noted that the central bank would explore ways to gradually reduce its holdings of restructured bonds a legacy of its financial support to the government during the economic crisis.
“I don’t think there’s a need now,” Governor Weerasinghe said. “This is all for open market operations. If we have an instrument, we can use it. If not, we have to come up with an instrument for open market operations.”
Historically, the central bank has used its own securities for liquidity absorption and reserve management. However, these central bank securities were phased out in earlier monetary policy transitions.
Around 2014, after exhausting Treasury bills, the central bank turned to alternative instruments such as dollar-rupee swaps and borrowed securities from the Employees’ Provident Fund to conduct open market operations and manage excess liquidity.
Selling down central bank-held securities reduces banking system liquidity, tightens domestic credit, and supports balance of payments surpluses often seen as deflationary in nature.
Currently, the central bank continues to receive interest coupons on its restructured bond portfolio, which amounts to approximately 2,500 billion rupees. These ongoing returns are deflationary and provide a buffer in monetary operations without the immediate need for asset offloading.
The central bank’s current approach suggests a preference for innovation over liquidation, seeking to preserve financial stability while gradually exiting from past crisis-driven interventions.
