Sri Lanka foreign reserves must provide policymakers with time during crises, Central Bank Governor Nandalal Weerasinghe tells Colombo forum.
Sri Lanka foreign reserves are not simply financial assets on a balance sheet, but the economy’s first defence against external shocks, Central Bank Governor Dr. P. Nandalal Weerasinghe said.
Addressing the “Reserve Management Conference 2026” in Colombo, he stressed that countries should not wait for a crisis before building adequate reserves.
No policymaker can accurately predict when the next shock will arrive or what form it will take, he said.
Sri Lanka Foreign Reserves Must Provide ‘Time’
Dr. Weerasinghe said the most valuable benefit strong reserves can provide during a crisis is “time.”
Adequate reserves give policymakers room to make decisions while allowing financial markets to stabilise.
That breathing space can help authorities rebalance the economy without forcing the country into a sudden and severely painful collapse.
The Governor pointed to Sri Lanka’s experience in 2022 as a clear example of why reserve strength matters.
The collapse in external reserves did not affect only the Central Bank’s accounts. It reached directly into people’s daily lives through import restrictions, higher inflation and the debt servicing crisis.
Sri Lanka’s external sector has since improved following structural reforms implemented over the past several years.
However, Dr. Weerasinghe cautioned that reserve accumulation does not follow a straight line.
Foreign reserves built during favourable conditions can disappear rapidly when countries face unexpected external shocks.
Reserve Management Moves Beyond Dollars and Gold
Traditional reserve management has generally focused on three priorities: safety, liquidity and yield.
However, Dr. Weerasinghe said today’s global financial environment is far more complicated.
Geopolitical risks can no longer be treated as distant external issues because power struggles, trade sanctions and disruptions to international supply routes can directly influence investment decisions.
The US dollar continues to dominate international trade, but the Central Bank recognises the risks of relying excessively on one currency.
At the same time, diversification should not become a trend pursued simply for its own sake.
Dr. Weerasinghe said countries must preserve sufficient “liquidity” so reserves can be accessed immediately when a crisis develops.
While gold and digital assets continue to attract interest, policymakers must also examine the limits surrounding their liquidity before making reserve allocation decisions.
AI Cannot Replace Human Judgment
Dr. Weerasinghe also addressed the increasing use of artificial intelligence and data-driven models in global financial management.
He said technology cannot completely remove uncertainty from economic decision-making.
Algorithms largely depend on historical data. Therefore, they can fail when economies encounter structural shocks that previous datasets do not adequately capture.
AI should consequently strengthen the decision-making capabilities of officials rather than replace human judgment, according to the Governor.
Four Principles for Future Reserve Management
Dr. Weerasinghe outlined four principles that should guide reserve management as global risks continue to evolve.
The first is “adequacy before optimization.”
Authorities should establish whether reserves are sufficient for the risks a country faces before concentrating on obtaining higher investment returns.
The second is “purposeful diversification.”
Central banks should diversify reserve assets while protecting liquidity and avoiding unnecessary complexity.
The third principle involves integrating geopolitical risk directly into investment decisions.
Reserve managers must consider sanctions, legal restrictions and potential barriers to market access when designing investment strategies.
The fourth is “dynamic reserve management.”
Central banks should continuously adjust their frameworks as global interest rates, technologies and international trade patterns change.
Dr. Weerasinghe concluded that the long-term answer cannot depend solely on borrowing or artificial controls in the foreign exchange market.
Instead, Sri Lanka must build an economy capable of naturally earning and retaining foreign currency.
He said creating such an economy remains the only sustainable route towards long-term stability, while stronger Sri Lanka foreign reserves provide the essential buffer and decision-making time needed when the next external shock arrives.
