Sri Lanka's Central Bank Governor W D Lakshman. Photo: AFP / Tharaka Basnayaka / NurPhoto

Sri Lanka’s central bank on Monday called for further import restrictions to address a crippling foreign exchange crisis, following a string of loans from Asian neighbors including impoverished Bangladesh.

The island nation’s foreign exchange reserves were badly hit last year as the Covid-19 pandemic struck and the local currency came under intense pressure and fell to a record low.

International rating agencies have since expressed fears that Colombo would not be able to service its huge foreign debt.

The Central Bank of Sri Lanka last week tightened its controls on dollar sales, leading commercial financial institutions to impose quotas on importers of essential commodities.

But Central Bank Governor W D Lakshman said more restrictions were needed.

“What the central bank is doing now, with the participation of all commercial banks, is judicious management of imports and foreign reserves,” Lakshman said in a statement.

The bank is “of the view that there is further space to curtail non-essential and non-urgent imports,” he added.

Sri Lanka had already banned luxury goods and car imports since last year to combat the outflow of foreign currency. 

The ban first imposed in March last year applied to tumeric – a staple in local curries – and to tiles, toilets, tires, cosmetics, vehicle spare parts, electronics and electrical appliances.

The country’s foreign reserves are currently at $4 billion, down from $7.8 billion in late 2019 when the government of President Gotabaya Rajapaksa came to power promising robust growth.

The economy shrank by a record 3.6 percent last year – the worst downturn since independence from Britain in 1948 – as the pandemic wiped out the island’s lucrative tourism sector.

Lakshman said Sri Lanka would continue to meet its debt service obligations amounting to $3.6 billion in the next six months.

Sri Lanka has borrowed $250 million from neighbouring Bangladesh, which is expected to come through next month.

It also expects to borrow another $400 million from India in August.

The country also hopes to get $800 million from the International Monetary Fund in August, the governor said.

In May, Sri Lanka secured a $500 million loan from South Korea.

China’s central bank also granted a $1.5 billion currency swap to finance imports from the Asian giant in February.

Sri Lanka has borrowed heavily over the years. Some of the debt was used to finance vanity projects like massive convention centers and other infrastructure items that have become white elephants.