Sri Lanka’s central bank has bought 177.3 million dollars from people in September 2025, a month in which an external ‘current account’ deficit was recorded for the first time in the year, official data shows.
Post World War II central banks which print money to cut rates, rejecting classical economics, usually blame ‘current account deficits’ for forex shortages and depreciation, reverting to beliefs held by classical Mercantilists that the trade deficit (deficit in the commercial balance) depreciated money and not the flawed operating framework of the note issuing authority.
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Sri Lanka’s central bank has reported that the external current account was consistently in ‘surplus’ until August 2025, totalling 1,857 million dollars (revised), but the rupee also depreciated during the period.
From March to August 2025 the current account surplus was 1,400 million dollars.
From March to August the rupee depreciated from 295.5 to the US dollar to 302.45 by purchasing dollars from the market and creating excess liquidity in unsterilized purchases, which was not redeemed for private transactions when they hit the forex market through credit.
In September the rupee further depreciated, this time with a reported current account deficit.
Despite the current account ‘deficit’ the central bank was able to buy 177.3 million dollars from the market.
A current account deficit indicates that payments were financed by financial account inflows (including credits or delayed payments), while a current account surplus indicates heavy outflows through the financial account or reserve building or both.
Critics have pointed out that modern central banks, especially independent ones, are unaccountable both to the public and parliament unlike in the classical period when they were restrained by multiple laws including its monetary law usually then referred to as a ‘constitution’ which blocked discretion.
“Peacetime exchange controls are a key tool of unaccountability, where errors in the operating framework are covered up by restricting the economic freedoms of the public,” says EN’s economic columnist Bellwether.
“UK in 1947 (after nationalizing the Bank of England) was a key nation that imposed peacetime exchange controls under aggressive full employment policy, similar to potential output targeting unleashed against Sri Lanka citizens from 2015.”
The Sterling, probably the premier global currency since the Roman solidus before the policy rate and open market operations were invented in the 1920s, suffered a massive collapse in 1949 shortly after exchange controls were imposed.
In 2025, the rupee has been depreciated both during current account surpluses and deficit under another policy called a ‘flexible’ exchange rate.
“Both exchange controls and flexible exchange rates or ‘exchange rate as the first line of defence’ are hallmarks of central bank un-accountability.
“Both are used to cover up errors in the operating framework of IMF-prone central banks which trigger monetary instability with inflationary operations or ad hoc international operations which deliver confidence shocks.
“Under the former, exchange controls, after macro-economists print money, under the latter, money debased, leading to higher inflation in food and energy prices and social unrest.
“In Sri Lanka trade controls are also imposed, unlike in the UK where the free trade brought by 19th century classical liberals from the time of the abolition of Corn Laws has been fortunately unshaken.”
There is now a tendency to blame vehicle imports for current account deficits.
The central bank has suspended inflationary operations (except for buy-sell dollar swaps) for the moment.
The coupons on the central bank’s bond portfolio are also deflationary, which can help trigger an overall balance of payments surplus, subject to the effect of inflationary swaps.
Exchange rates come under pressure due to deficits in the overall balance of payments deficit from inflationary policy. Under inflationary policy there are no dollars for the central bank to buy.
Under deflationary policy the central bank can either depreciate or appreciate the currency through exchange rate policy (under-buying or over buying-dollars compared to deflationary operations where liquidity is withdrawn).
The central bank has also sold some dollars purchased in 2025 to the Treasury to settle debt, unlike in 2015 to 2020 when Sri Lanka engaged in a borrowing frenzy to settle debt amid flexible inflation targeting.
Any dollars sold to the government or any other party at a price higher than the central bank paid for it new money is also deflationary, ENs economic columnist says.
Under broadly deflationary policy the central bank has so far missed its 5 percent inflation target through currency crises were triggered in the recent past.
There however have been warnings that unless the central bank is required to sell down its Treasury bond stock in the next IMF program or the Treasury is allowed to buy dollars freeing it from the grip of the ‘independent’ central bank, a second default could come.
ECONOMYNEXT – (Colombo / Nov02 / 2025)