ECONOMYNEXT - Sri Lanka's economy is on a stabilizing path and gaining confidence of investors and domestic interest rates are also falling, Central Bank Governor Indrajit Coomaraswamy said.
"The economy continues to stabilize in broad terms," Coomaraswamy told reporters.
He said budget were improving with the deficit coming down and heading for a surplus in the current account.
He said the International Monetary Fund's executive board has just approved the third review and both Fitch and Standard and Poor's has lifted a negative outlook on Sri Lanka's rating, recognizing the gains made.
A sovereign bond sold at a 620 basis point risk premium over the US Treasuries yield last year is now trading narrower at 550 basis points, Coomaraswamy said.
Moody's has kept the rating unchanged. Moody's also warned that Sri Lanka may not be able to collect much more forex reserves, after proceeds of the Hambantota port sale ends.
However foreign reserves stock are related to the credit cycle and when the central bank stops printing money and domestic credit slows it is easy to collect forex reserves.
Forex reserves are spend when money is printed generating excess demand which spill over to imports, requiring the currency to be defended.
On average the central bank is buying about 200 million dollars from forex markets a month at the moment, Coomaraswamy said.
Deputy Governor Weerasinghe said Moody's forecasts of reserves have already been shown to be wrong.
As of December 27, Sri Lanka's forex reserves had topped 8.1 billion US dollars but after some year-end payments, Sri Lanka would end the year with about 7.8 billion US dollars in reserves, Coomaraswamy said.
Sri Lanka may end up with about 10 billion US dollars in reserves by end 2018, he said. However if credit picks up, analysts say reserve collection will stop.
Sri Lanka's exchange rate has also stabilized, Coomaraswamy said. The rupee had depreciated 1.9 percent against the US dollar this year.
Analysts have warned that the central bank's declared aim of targeting a real effective exchange rate index - instead of or in addition to inflation - by depreciating the currency to boost exports is an inflationist Mercantilist strategy based on unsound money.
Sri Lanka's balance of payments problems and high inflation is primarily due to the central bank targeting two anchors - and exchange rate via a peg and prices via money printing to keep interest rates down. (Colombo/Dec27/2017)