ECONOMYNEXT - Sri Lanka ended 2017 with 7.95 billion US dollars of forex reserves and has cut the central bank's exposure to swaps by around a billion US dollars, Governor Indrajit Coomaraswamy said.
The central bank had been able to buy 1.7 billion US dollars from forex markets amid lower credit growth and a sell-down of domestic assets to mop up liquidity generated from dollar purchases.
Coomaraswamy said the agency had cut its exposure to forex swaps from 2.4 billion US dollars to 1.4 billion US dollar during the year.
The forex swaps which give forward cover to some domestic borrowers expands the risk to the central bank and encourages risk taking in the banking system.
Sri Lanka has a soft-pegged exchange rate system which is dependent on foreign reserves.
The rise of foreign reserves through sterilized purchases during the year, is also strong evidence of the existence of a soft-pegged monetary system with a de facto peg.
However the central bank is planning to move to what it calls 'flexible inflation targeting' framework by 2020. (Colombo/Jan03/2017)