In April 2025, Sri Lanka’s foreign exchange reserves fell by 3%, slipping from the previous month $6.53 billion to $6.32 billion, according to data from the Central Bank of Sri Lanka. The $210 million decline, despite the ongoing IMF-supported programme, highlights persistent vulnerabilities in the country’s post-crisis recovery trajectory.
Foreign reserves are a critical ‘cushion’ for a country reliant on imports for essentials such as fuel, medicine, and food. Additionally, it offers currency stability which manages exchange rate volatility and protects the domestic currency from sharp depreciation or speculative attacks. Sri Lanka could also use these reserves to repay foreign debt and raises concerns about default risk, damaging credit ratings and investor confidence. For a country like Sri Lanka, returning from an economic disaster, even the smallest loss of investor confidence or doubt can have catastrophic effects on national investment which could cause significant issues for Sri Lanka’s recovery.
As, Peter Breuer, IMF Senior Mission Chief for Sri Lanka, cautioned:
“The recovery is expected to continue in 2025. As the economy is still vulnerable, it is critical to sustain the reform momentum to ensure macroeconomic stability and debt sustainability and promote long-term inclusive growth. There is no room for policy errors.”
It is worth highlighting that Sri Lanka's macroeconomic indicators suggest surface-level stabilisation. Inflation has slowed, the rupee has shown signs of consolidation, and fiscal discipline has improved under IMF oversight. However, the decline in reserves signals the fragility beneath this recovery.
With reserve pressures mounting, the government are likely to accelerate structural reforms - particularly in revenue generation, state-owned enterprise efficiency, and export diversification - to further mitigate external risk and attract longer-term investment.
The North-East: Marginalised by Design?
Amid the macroeconomic focus, regional disparities remain underexamined. The Tamil homeland in the North -East of the island - historically underserved and disproportionately impacted by the genocidal war - remains peripheral to Sri Lanka’s national development agenda.
Reduced fiscal space risks exacerbating this divide. With austerity measures limiting state expenditure, targeted investment in post-conflict reconstruction, social infrastructure, and rural development in the North-East may be further deprioritised.
Though as successive government budgets have shown, development of the North-East has never been a priority, military occupation has.
As Devana Senanayake observes in The Diplomat,
“The economic crisis was island-wide, but in the Tamil homeland, long-standing economic disenfranchisement magnified the effects.”