📈 Myth Busting: CBSL Retains Full Control Over Exchange Rate Policy

A widespread public misconception claims that under the Central Bank Act (CBA) of 2023, the Central Bank of Sri Lanka (CBSL) has no role or tools for exchange rate management, shifting responsibility to the Government. According to authoritative analysis, this assertion is entirely false. • Legal Mandate & Reality: Section 7(1) of the CBA of 2023 explicitly reintroduces the determination and implementation of exchange rate policy as a core function of the CBSL. This rectifies a previous omission from an old 2002 amendment. • Key Policy Tools Utilized: • Interest Rates: The CBSL can adjust the Overnight Policy Rate (OPR) to manage import demand. This was demonstrated in late May 2026, when the CBSL hiked the OPR by 100 basis points to 8.75% to curb rising private credit and import pressures. • Forex Interventions: The CBSL actively buys and sells foreign reserves to prevent short-term volatility. In May 2026, the CBSL recorded a net sale of US$ 211.3 Mn to ease depreciation pressure on the Sri Lankan Rupee. • Export Regulations: The CBSL recently reduced the export proceeds conversion window from three months to one month, fast-tracking the injection of foreign currency into the local banking system. • The Economic Nexus: Under the "Impossible Trinity" economic principle, interest rates and exchange rates are inseparable. Maintaining a low-interest-rate environment during currency depreciation would only drive up imports and worsen the Balance of Payments. A tighter interest rate policy remains a vital, scientifically backed tool to stabilize the national currency.