ECONOMYNEXT – Sri Lanka’s central government debt grew by 936 billon rupees up to September 2025, through the budget deficit was only 441 billion rupees, with foreign debt rising despite a net repayment, amid rupee deprecation, official data show.
The budget deficit reduced to 441 billion rupees up to September 2025 down from 970 billion rupees, despite a salary hike to state workers, as people paid taxes of 3,563 billion rupees, up from 2,689 billion last year, central bank data show.
The central government debt however grew by 936 billion rupees, which is more than twice the budget deficit, with foreign debt expanding 545 billion rupees to 18,974 billion by September 2025 from 10,429 billion at end 2024.
Sri Lanka’s rupee depreciated in 2025 amid record current account surpluses and improvement in budget, denying the usual scapegoats macro-economists point to after engaging in monetary debasement.
In Sri Lanka and in other troubled countries that go to the IMF often there is a narrative spread that the exchange rates are “market determined”.
“Exchange rates are not market determined. The price of carrots and beans are market determined,” explains EN’s economic columnist Bellwether.
“If the value of money is market-determined the economy is reduced to a primitive state of barter. In fact that is what happens to countries without stable money. Interest rates are market determined.
“Exchange rates are determined or anchored by the operating framework of the central bank. In the case of a clean float the value of the currency is purely determined by monetary policy anchored and (usually) anchored to an inflation index.
“In a hard peg or currency board where there is no monetary policy, the value of the currency is determined or anchored by exchange rate policy.
“In a so-called flexible exchange rate regime or soft-peg, the value of the currency is determined by the arbitrary application of both exchange rate and monetary policy. That is why currencies go haywire.”
“Central banks started to depreciate currencies at will after the IMF’s second amendment to its articles, some time after the collapse of the Bretton Woods, leading to serial defaults in Latin America in the 1980s.
Sri Lanka’s President Anura Kumara Dissanayake urged that the exchange rate be kept stable in the budget speech.
Politicians are held accountable for depreciation when the price of food and energy rise and taxes are raised to cover national debt.
Up to September, foreign debt expanded in rupee terms even as there was a net repayment.
The deficit was financed by 515.3 billion rupees of domestic financing and with a net repayment of 93.6 billion rupees in foreign debt.
The Treasury in 2025 bought some dollars for rupees from the Central Bank to repay debt, but analysts have urged the Treasury to buy dollars without depending on the central bank since its ability to collect dollars will disappear if inflationary open market operations resume.
Under a flexible inflation targeting, and the current monetary law, the central bank is not under any legal obligation to run deflationary policy to fulfill any legal or de facto requirement to give current account dollars to the government to repay debt.
To build reserves from current inflows to give the government, the central bank has to peg and run deflationary policy at an appropriate interest rate.
After the May rate cut in particular the central bank has fallen short of reserve projections even as people paid more taxes.
Analysts had pointed out that monetary debasement, inflation and currency troubles are a legal and political problem involving the failure of the parliament to control the central bank which is not accountable.
“It is up to the parliament to control the central bank which has been given various monopolies and priviledges to force the people to accept its money,” says Bellwether.
“The British parliament had vast knowledge of money in the classical periods before macro-economics corrupted economics. That is how the Sterling became the pre-eminent currency of the world and UK became a free trading industrial exporter.
“Not only were classical economists like Ricardo in parliament, but other like Alexander Baring (of the banking family), knew exactly how note issue banks worked and they did not allow the Bank of England to escape accountability by spurious claims
The central bank has also been given a de facto ‘Government Acceptance’ privilege to pay taxes in rupees, which is also blocking non-debt dollar revenue streams to the Treasury.
Though the Treasury does not buy dollars in the market to repay debt, making a second default likely, and is forced to go into borrowing frenzies, other ministries buy dollars in the market for import bills. (Colombo/Dec30/2025)
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