Sri Lanka crisis: Building buffers for future shocks
Dr Chandranath Amarasekara, Deputy Governor of the Central Bank of Sri Lanka, discussed lessons from the country's 2022 economic crisis. Speaking at a conference on May 7, 2026, he emphasized the critical role of policy buffers and strong institutions.
From 70 percent inflation to 5 percent growth
Sri Lanka's 2022 economic crisis saw inflation surge to 70 percent by September, the exchange rate depreciate to LKR 360 per US dollar, and the economy contract by an unprecedented 7.3 percent.
Public debt-to-GDP ratio hit its highest level.
The Central Bank successfully brought inflation down to single digits within 10 months, aiming for a 5 percent target in the medium term under the new Central Bank Act.
By end 2025, the economy rebounded significantly.
Per capita GDP surpassed USD 5,000, and the economy exceeded USD 100 billion.
Real economic growth reached 5 percent in both 2024 and 2025.
Gross official reserves increased above USD 6.8 billion.
Fiscal primary deficits turned into surpluses, and government debt-to-GDP improved to 91.6 percent in 2025.
This turnaround was supported by macroeconomic stabilisation efforts and the strengthening of policy buffers.
Buffers: The unseen foundation
Crises rarely stem from a single error, but rather from the alignment of multiple vulnerabilities.
Sri Lanka's 2022 crisis was a culmination of prolonged erosion of fiscal and external buffers, a fragile macroeconomic framework, and heavy exposure to global shocks with limited policy space.
As the Deputy Governor noted, "Policy buffers are boring; until they matter.
" Policymakers bear a profound responsibility to safeguard the poor and vulnerable during such shocks.
Price stability, maintained by central banks, is vital as inflation disproportionately harms low-income households, acting as a regressive tax.
Financial system stability is equally crucial, protecting public savings and enabling smooth financial intermediation.
Delay is the most expensive decision
The Sri Lankan experience offers stark lessons for small open economies facing recurrent shocks.
Policy space is not created during crises; it must be built beforehand, supported by institutional credibility and clear communication.
In a less forgiving global environment, delay in addressing vulnerabilities proves to be the most expensive decision, underscoring the need for robust and non-episodic macroeconomic management.