by Our Correspondent in Colombo
Sri Lanka is once again facing growing fears of financial instability as a sharp expansion in the country’s money supply raises alarm among economists, market analysts, and citizens already scarred by the devastating economic collapse of 2022. While the government insists the economy is stabilizing under an International Monetary Fund-backed reform program, critics argue that the Central Bank of Sri Lanka is quietly reviving the same monetary practices that once accelerated the nation’s crisis.
At the center of the controversy is the dramatic increase in Sri Lanka’s aggregate broad money supply, known as M2b. According to Central Bank data, the money supply rose from Rs. 14,439.1 billion in January 2025 to Rs. 16,585.7 billion by March 2026, an expansion of more than Rs. 2.1 trillion within just 15 months. Economists critical of the government say this reflects large-scale money creation, even if it is not openly described as conventional currency printing.
The Central Bank has been purchasing dollars from commercial banks by injecting rupees into the financial system, a strategy officials view as necessary to maintain foreign exchange reserves and stabilize the banking sector. However, critics argue that this process amounts to indirect money printing, despite restrictions under Sri Lanka’s IMF agreement designed to limit inflationary financing.
Economic analyst Mr. Tennakoon said the mechanism is straightforward. According to him, the Central Bank cannot acquire dollars from commercial banks without first creating rupees. “What is happening here is money creation. Printing,” he said, arguing that the policy risks undermining confidence in the country’s fragile economic recovery.
The concerns are not limited to local observers. International economist Steve Hanke, who frequently criticized Sri Lanka’s inflation policies during former President Gotabaya Rajapaksa’s administration, recently summarized the country’s predicament on social media with a blunt statement: “Inflation story equals money supply story.” His remarks revived memories of the period leading up to Sri Lanka’s sovereign default in 2022, when rapid monetary expansion contributed to soaring inflation and the collapse of the rupee.
Recent market movements have deepened those anxieties. Financial commentator Ranga Sirilal reported that the rupee has depreciated by more than seven percent against the US dollar this year, weakening from around Rs. 327 per dollar last week and Rs. 299 last year to approximately Rs. 353. He also noted that the Central Bank printed Rs. 309.4 billion in March alone, bringing total money creation during the first three months of the year to over Rs. 610 billion.
For ordinary Sri Lankans, the economic impact is becoming increasingly visible. Newly issued banknotes bearing the signature of President Anura Kumara Dissanayake are now circulating widely across the country. Currency in circulation increased from Rs. 1.35 trillion at the beginning of 2025 to Rs. 1.65 trillion by May 2026, an increase of more than Rs. 300 billion. Economists warn that such growth in physical cash circulation could add further inflationary pressure in an economy where food, fuel, and household essentials remain highly sensitive to currency depreciation.
Public confidence has also been shaken by allegations of financial irregularities involving state institutions. After the Free Lawyers organization exposed what it described as a Treasury-related scandal in April 2026, accusations emerged concerning missing funds from several major institutions, including the Postal Department, Aswesuma welfare programs, state banks, the Road Development Authority, and SriLankan Airlines. Although investigations are ongoing, the revelations have fueled broader concerns about transparency and fiscal discipline.
Critics say the Central Bank has failed to provide a convincing explanation for the rapid increase in money supply, the unusual expansion of currency circulation, and what they describe as unofficial attempts to control the exchange rate. Reports indicate that Central Bank officials privately encouraged commercial banks and licensed money exchangers to maintain the dollar within a range of Rs. 329 to Rs. 335, despite pressure in the open market.
The Central Bank is also accused of informally maintaining an interbank exchange benchmark near Rs. 330 per dollar, a move some economists say contradicts IMF principles favoring market-determined exchange rates. At the same time, authorities have shortened the time allowed for importers to bring export earnings into the country from 90 days to 30 days, another measure critics compare to emergency currency controls introduced during the height of the previous crisis.
Analysts warn that these interventions may only postpone deeper economic pain. Rising inflationary pressure and currency weakness are expected to force an increase in interest rates in the coming months, potentially raising borrowing costs for businesses and households alike. Fuel prices and the cost of imported goods are also likely to rise if the rupee continues to depreciate.
Perhaps the most troubling issue for policymakers is that the aggressive monetary expansion has produced little improvement in Sri Lanka’s foreign reserves. Official reserves stood at USD 6.53 billion in March 2025 and had increased only marginally to USD 6.76 billion by April 2026. Economists point out that during 2023 and 2024, the Central Bank was able to build reserves by approximately USD 175 million per month without such dramatic growth in the money supply.
Meanwhile, Sri Lanka is expected to receive another USD 700 million installment from the IMF later this month. However, that funding is largely earmarked for budgetary support and Treasury operations rather than reserve accumulation, limiting its ability to strengthen the country’s external financial position.
Government debt also continues to climb. Outstanding central government debt, which stood at Rs. 28.24 trillion in late 2024, is projected to increase by nearly Rs. 1.75 trillion by the end of 2025, approaching Rs. 30 trillion. Economists warn that increasing debt alongside rapid money creation creates a dangerous combination that could weaken investor confidence and place renewed strain on the financial system.
For many Sri Lankans, the developments are an unsettling reminder of how quickly economic stability can unravel. Just four years after the island nation suffered its worst financial collapse since independence, fears are growing that unresolved structural weaknesses remain buried beneath the surface of official recovery narratives.
