ECONOMYNEXT – Sri Lanka’s central bank will disclose the volume of swap contracts with local banks in the near future, Deputy Governor Chandranath Amarasekera said, amid rising concerns over the agencies’ foreign exchange liabilities and liquidity injections.
The swap volumes will be disclosed on an ongoing basis, he said.
The Parliament’s Committee on Public Finance has questioned the rising volumes of swaps, as the central bank does not own them outright but are effectively borrowed.
Inflationary swaps also inject liquidity effectively monetizing foreign assets of banks, allowing them to given rupee loans without raising current rupee deposits and passing on forex risks to the government which is the ultimately responsible for the losses of the central bank.
In 2025, the central bank had injected 258 billion rupees (around 800 million dollars) through inflationary swaps, data from the central bank itself showed, raising questions about the actual volume of unencumbered foreign reserves the central bank has.
When banks give rupee loans with the foreign assets monetized with inflationary swaps, imports go up and the central bank does not return the dollars to importers (does not redeem the newly created rupees), the currency will depreciate as in 2025.
If the dollars are returned to prevent debasement, and redeem the liquidity created in entering the swap (suppressing rates in the process), the central bank ends up with a negative open position on the derivative.
Rates may rise steeply to correct balance of payments troubles that eventually emerge, when rates are held down for extensive periods central bank credit.
If more swaps are executed, creating more money, or the open position (reserve sales) are offset with new money to suppress interest rates further and the rupee depreciates, there is a loss to the central bank on the open position.
In 2022 after extensive use of swaps as well as other borrowings to enforce rate cuts, the central bank made a 788 billion rupees forex loss amid a steep currency collapse.
RELATED : Sri Lanka central bank makes Rs788bn forex loss in 2022
The reporting method may itself be an incentive for central banks to enter into swaps and depreciate currencies.
The central bank’s disclosed ‘net foreign assets’ number also includes swaps and the liability on the swap is discounted as the counterparty is domestic, officials said.
The dollar liability is adjusted against net domestic assets.
COPF Chief Harsha de Silva, has questioned the accounting treatment of net international reserves, the rising swap volumes.
It was de Silva who took started educating the public against the central bank’s money printing from around 2004 which led to some changes in the monetary law.
At the time the central bank monetized new debt, and old government debt held by banks, insurance companies and the public that came up for renewal at auctions.
In subsequent currency crises, the central bank monetized other assets to print money and suppress rates to allow banks to give rupee loans with printed money rather than to the government.
Money was printed against domestic debt held by banks linked to past deficits (either through overnight, term reverse repurchase deals, or outright purchases), even when fiscal corrections were made, triggering external controls as well as public discontent and political instability
Liquidity from swaps, including dollars held by the Treasury figured in the 2018 currency crisis and political instability.
Swaps with foreign central banks are harmless when they are entered into, provided they are notional, but will create external instability if the proceeds are used and the interventions offset with new money to maintain a single policy rate.
The monetization of foreign assets of banks as well as offsetting sales of foreign central bank swaps with new money was a key contributor of external trouble in the run up to and after the default and there have been calls to outlaw the practices as part of measures to overhaul the operating framework of the central bank to preserve the value of the monetary unit. (Colombo/Feb17/2026)
