Sri Lanka in Stronger Position Than Past Years to Handle External Shocks

COLOMBO (News 1st); Governor of the Central Bank of Sri Lanka, Dr. Nandalal Weerasinghe, says the country is currently in a relatively strong position to absorb external shocks, despite heightened global uncertainty triggered by the Middle East conflict and rising energy prices.

Speaking on the outlook for inflation, Dr. Weerasinghe noted that Sri Lanka’s inflation target remains at 5 percent, while actual inflation has stayed well below that level. Inflation stood at 1.6 percent last month and is projected to be around 2 percent by the end of the current month.

“With our projections, we see that we have a sufficient buffer to maintain inflation around 5 percent,” he said. Prior to the Middle East conflict, the Central Bank had expected Sri Lanka to reach the inflation target by the third quarter of this year. However, due to the external shock and increases in energy prices, the Central Bank now expects inflation to reach the 5 percent target sometime in the second quarter of 2026.

Dr. Weerasinghe cautioned that projections remain highly uncertain, noting that economic conditions are changing day by day and week by week, making it difficult to forecast beyond one or two months. Nevertheless, he stressed that Sri Lanka’s current low inflation gives the country valuable space to absorb external price shocks compared to many other economies.

In addition to inflation buffers, the Governor highlighted the country’s strengthened reserve position. Sri Lanka’s gross official reserves stood at USD 7.3 billion at the end of February, the highest level recorded in recent years. “Compared to where we were during the last couple of years, we are in a better position,” he said, adding that the higher reserve buffer provides capacity to absorb external shocks for a period of time.

Dr. Weerasinghe also said that there is no current risk to financial stability, the banking sector, or the broader financial system. According to the Central Bank, no significant impact has been observed on the financial sector despite volatility in global markets and energy prices.

From a fiscal perspective, the Governor said the government has also performed better in recent times, building up buffers through improved fiscal performance. He emphasised that a country’s ability to withstand external shocks depends on the strength of both monetary and fiscal buffers and how long those buffers can be sustained as global conditions evolve. While acknowledging that no one can predict how long the current uncertainties will last, Dr. Weerasinghe pointed to early signs of de-escalation in some areas, particularly in petroleum markets. Oil prices, he noted, have come down from their highest peaks, although they remain volatile and at elevated levels.

If volatility proves to be short-lived, he said Sri Lanka should be able to manage the shock without major disruption. However, if the situation persists for a longer period, adjustments may be required to inflation projections, policy paths, and fiscal space. During this period of uncertainty, Dr. Weerasinghe said authorities are closely monitoring developments and will respond with appropriate policy measures as needed. He noted that the government has already taken steps to reduce energy demand, which could help limit the impact on the economy and inflation.

Looking ahead, the Governor said Sri Lanka will continue to respond based on how global conditions unfold, stressing that shocks of this nature are beyond the control of any single country. He added that the impact of the current crisis is being felt across countries, including advanced economies, and that Sri Lanka’s position is broadly comparable to that of many other nations facing similar external pressures.