ECONOMYNEXT – Sri Lanka’s gross official forex reserves dropped 452.6 million US dollars in May 2021 to 4,018.1 million US dollars, official data showed amid financial account pressure and the use of modern monetary theory.
In April 2021 Sri Lanka’s forex reserves recovered to 4,470 million US dollars from a 10 year low of 4,055 million in March 2021 as a 500 million dollar loan was given by China Development Bank.
Following the injection new money printing stopped and the central bank sold down some of its reserves.
In April 2021 the central bank also bought 62.8 million US dollars from the market.
However excess liquidity from previous injections remain in the system.
Sri Lanka’s forex reserves have been on a steady downward path from around August 2019 when liquidity injections for ‘output gap targeting’ began.
Output gap targeting with a (gold) peg by then Fed especially after the removal of then Fed Chief William McChesney Martin by President Richard Nixon led to the collapsed of the Bretton Woods system and the centuries old gold standard.
Sri Lanka’s soft peg with the US dollar had collapsed from 110 to 131 due to pro-cyclical liquidity injections in 2011/2021 and from 131 to 151 due to pro-cyclical liquidity injections in 2015/2016 and to 182 due to pro-cyclical liquidity injection in 2018.
From 2020 to date the rupee has collapsed to 200 so far due to liquidity injections, which were not always pro-cyclical (credit collapsed from April to September) but did not match developments in the financial account after a severe credibility loss that occurred particularly after ‘flexible exchange rate’ episode in March 2020.
Liquidity injections are still being made. (Colombo/June12/202)