Sri Lanka’s improved Treasury liquidity masks a weaker fiscal position, with cash balances swinging from a deficit of Rs. 832 billion in 2022 to a surplus exceeding Rs. 1.2 trillion by August 2025, driven by Rs. 1.78 trillion in excess borrowing that has raised the interest burden on unused funds, Verité Research warned.

“Sri Lanka’s treasury cash balance has improved sharply. At first glance, that looks like a striking fiscal turnaround. It suggests the Government has rebuilt financial space. But that reading is incomplete,” the think tank said in brief yesterday.

“This rise in cash balances did not come from revenue left over after the Government met its expenses. It came from borrowing more than was needed at the time and holding the excess as cash in the Treasury,” it noted.

Verite said:

A large cash balance can create the impression that the Government has money to spare – or has come into a substantially better financial position. Is that what has happened?

The Finance Ministry’s cash flow statements show that, from 2022 to August 2025, the Government borrowed more than it needed to cover its Budget shortfall and debt repayments. The extra borrowing was then accumulated as cash in the Treasury, instead of being used to reduce debt (see table).

The pattern is clearest in 2023, when the cash buffer grew the most.

That year, the Government’s total financing need was Rs. 7,495 billion. This included Rs. 5,331 billion in debt repayments and a Budget deficit of Rs. 2,164 billion. Yet, the Government borrowed Rs. 8,137 billion. In effect, it borrowed around Rs. 642 billion more than it needed at the time. That excess was added to the Treasury cash balance.

The same pattern can be seen across the full 2022 to 2025 period.

Between 2022 and August 2025, the Treasury borrowed in total Rs. 1,783 billion more than it needed for its financing requirements. This extra borrowing was used to build up the cash buffer, which was negative Rs. 832 billion at the start of 2022 and increased, by these means, to a positive Rs. 1,205 billion by August 2025.

A simple example helps. Imagine a person that takes a loan and leaves the money in their bank account. Their cash balance goes up; but so does their level of debt. In fact they go up equally, leaving the net asset position same. The same dynamics and logic applies to the Treasury cash balance and the Government.

Is the Government better off?

A rising cash buffer can be easily misinterpreted as a sign of a stronger fiscal position. However, with a debt financed cash buffer, this is not the case.

Yes, in terms of liquidity, the Government is in a better position. The cash buffer enables the Treasury to meet urgent financing needs without coming to the market to borrow; and more importantly, creates space to reduce borrowing at the regular Bond auctions, when the asking yields of lenders seems too high.

Now, in terms of interest cost, the Government is in a worse position. The Government is effectively paying to keep borrowed money that it isn’t using. The cash balance can earn an interest, but almost surely a lower rate than what was paid to borrow it – making a net loss for every day that it holds the cash balance.

Therefore, while a positive cash balance can ease short-term liquidity pressures, it does not put the government in a better fiscal position.

In fact, when the cash balance is in excess of liquidity requirements, the fiscal outcome is negative – because it increases the debt and interest burden. So, while having a cash buffer is positive – it allows the government to push back on auction bids that ask for yields that are too high; having a lot of it is negative – the Government ends up carrying an additional interest burden for holding cash that it does not immediately need, the think tank said.

Sri Lanka’s fiscal position strengthened sharply in January 2026, with the primary surplus rising 86.7% YoY to Rs. 222.82 billion and the overall Budget deficit narrowing 96.8% to Rs. 3.81 billion, indicating a near-balanced position. Revenue growth remained strong, up 35.3% on higher tax collections, while expenditure was largely contained, rising just 1.4%.

The improved performance, despite a Rs. 500 billion post-Ditwah spending allocation, reflects continued fiscal consolidation and has created space for a Rs. 100 billion short-term relief package to cushion the impact of global energy shocks.

Sri Lanka’s government on Sunday 26) issued a call for investments in a currently loss-making airport, after a 30-year lease agreement with an Indo-Russian joint venture failed to take off.

Mattala Rajapaksa International Airport, built with Chinese loans near a wildlife sanctuary on the island’s southern coast, has no regular flights.

The small airport has failed to generate enough revenue to cover even electricity bills since opening in 2013, and has been a running sore on state coffers.

Calling for expressions of interest from investors, the government said the facility offers “untapped potential for growth opportunities… for exotic tourism development and strategic investment”.

In 2024, the Sri Lankan government announced it had awarded a 30-year lease to a joint venture between India’s Shaurya Aeronautics and Russia’s Airports of Regions Management Company, but the plan never materialised.

The airport is named after former president Mahinda Rajapaksa, who borrowed heavily from China for infrastructure projects that quickly became commercial failures.

Debts to China are partly blamed for an unprecedented financial crisis that prompted Sri Lanka to default on its US$46 billion foreign debt in 2022.

Since receiving an International Monetary Fund bailout early the following year, Sri Lanka has sought to privatise a host of unprofitable state-owned enterprises, with no success.

The Mattala airport is located on a migratory bird route, with several aircraft forced to ground after striking airborne fowl.

At one point, Sri Lanka’s military deployed hundreds of troops to remove deer, wild buffalo and elephants from the runway so operations could continue.

The airport is regarded as an alternate destination in case of bad weather at the country’s main international gateway in the capital Colombo, a half-hour flight away.

Several cargo carriers and some charter aircraft operate via Mattala, but the revenue is insufficient for the facility’s upkeep, according to official reports.

In 2017, unable to repay a large Chinese loan, Sri Lanka allowed China Merchants Port Holdings to take over the Hambantota port, near Mattala.

The deal, which granted the Chinese company a 99-year lease, fuelled fears over Beijing’s use of “debt traps” to exert influence.

(AFP)

The Government has suspended four senior officials of the Ministry of Finance – two from the Public Debt Management Office (PDMO) and two from the External Resources Department (ERD) – pending a disciplinary inquiry into a cyber fraud that resulted in the diversion of $ 2.5 million.

The funds had been allocated for an external debt repayment to an Australian creditor.

According to preliminary findings, the payment had been redirected after unauthorised access had been gained to the email system of the ERD.

The incident is now under investigation by multiple agencies, including the Criminal Investigation Department (CID), with support from international counterparts.

Treasury Deputy Secretary Ananda Kithsiri Seneviratne confirmed the positions of those suspended.

“The suspended officials include one Additional Director General and one Director from the PDMO, as well as one Director and one Assistant Director from the External Resources Department,” he said.

He added that the suspensions would remain in effect until the conclusion of the inquiry.

“The duration will depend on the process and a disciplinary inquirer has already been appointed. The inquiry is expected to take some time,” he told The Sunday Morning.

The incident has raised concerns regarding financial controls within the Treasury, particularly in the context of Sri Lanka’s ongoing debt management process. However, officials maintain that the country’s external obligations remain unaffected.

Treasury Secretary Dr. Harshana Suriyapperuma said that the matter had been reviewed in the context of debt servicing commitments.

“We examined whether this situation could be considered a technical default. Based on advice received, Sri Lanka has demonstrated both the capacity and the intention to service its debt by initiating the payment. The diversion occurred due to the actions of third parties. We are also engaging with the relevant creditor in good faith. On that basis, we have been advised that this does not constitute a technical default,” he said.

Investigations are being coordinated by the CID following complaints lodged by the Ministry of Finance. The Financial Intelligence Unit (FIU) of the Central Bank of Sri Lanka (CBSL) and the Sri Lanka Computer Emergency Readiness Team (Sri Lanka CERT) have also been engaged to trace the transaction and identify those responsible.

Authorities are working with Australian counterparts, as the funds were routed through a bank account in Australia.

The Australian High Commission in Colombo has acknowledged the issue and is facilitating coordination between the two countries. Australian authorities have also indicated their awareness of the payment irregularity involving their export credit agency.

The Ministry of Finance said that, alongside the ongoing investigations, steps were being taken to strengthen internal systems and prevent similar incidents. The outcome of the disciplinary inquiry will determine any further administrative action against the suspended officials.

The chief prelates of the three main Buddhist sects have emphasized that security forces must urgently carry out investigations and take legal action against drug networks and drug distributors who are allegedly and systematically recruiting young monks into illegal activities.

Issuing a joint statement, the Mahanayake Theros strongly condemned what they described as an unscriptural and illegal act committed by a group of monk impersonators who misused the Buddhist robe and engaged in drug trafficking.

They further stated that investigations will be conducted into all individuals involved in this act and those found guilty will be expelled from the monastic order.

The statement was signed by the Most Venerable Thibbatuwawe Sri Sumangalabhidhana Maha Thero, Maha Nayaka of the Malwathu Chapter of the Siam Sect; the Gnanarathana Abhidhana Maha Thero, Maha Nayaka of the Asgiri Chapter of the Siam Sect; the Most Venerable Makulawe Wimala Maha Thero, Maha Nayaka of the Ramanna Sect ; and the Most Venerable Karagoda Uyangoda Maithrimurthi Maha Thero, Maha Nayaka of the Amarapura Sect

The statement further notes that all individuals involved in this illegal act, which they say has abused the traditional respect and acceptance given to monks in Sri Lankan society as well as the sacred devotion of Buddhists toward the Buddhist robe, should be duly punished.

It also highlights that this incident once again underscores the need to establish a proper mechanism to investigate such cases and expel from the order those who misuse the Buddhist identity and the robe for unlawful activities.

In addition, they have stated that every young monk should be continuously monitored, and if any conduct against the Sasana is observed, teachers and senior monks must investigate and take steps to guide such young monks towards proper discipline and restraint.

Earlier today, Sri Lanka Police has revealed that the 22 individuals who appeared to be monks, who were arrested with stocks of Kush and Hashish narcotics, will be detained for seven days for questioning, under detention orders.

The suspects are aged between 19 and 28.

The group was apprehended at the Bandaranayake International Airport in Katunayake by officers of the Police Narcotics Bureau (PNB), while attempting to smuggle a massive haul of Kush and Hashish valued at over Rs. 1.1 billion.

The arrests were made based on an intelligence tip-off received by the PNB, as the group arrived at BIA in Katunayake from Thailand.