Cautious foreign investment poses liquidity risks: CB

Foreign investor sentiment towards Sri Lanka’s money and capital markets remains cautious, leading to subdued investment inflows, according to the Central Bank’s Financial Stability Review 2024. 

The muted interest from foreign investors is raising concerns about liquidity conditions in the domestic foreign exchange market, particularly as the country prepares for potential capital outflows.

The Central Bank noted that while macro financial conditions are improving—with low inflation and a strengthened rupee—the country’s ability to attract foreign capital remains limited.

This subdued foreign investment could strain liquidity in the foreign exchange market, especially with envisaged outflows in the coming months.

The report emphasised the need for prudent policy measures to address these liquidity challenges, while maintaining fiscal consolidation efforts. 

Although macro financial conditions have improved to a greater extent during the period under review compared to the recent past, the Central Bank noted that risks and uncertainties continue to challenge the stability of the financial system, particularly due to exogenous factors and structural imbalances in domestic macro financial conditions. 

“Addressing such challenges requires a combination of prudent, timely, and coherent mix of policies while continuing the reform agenda and avoiding swings in policies to sustain the progress made thus far and to move towards greater macro financial stability,” the Central Bank said.