ECONOMYNEXT – Sri Lanka can buy at least 150 million US dollars a month from forex markets to end the year with around 10 billion US dollars in forex reserves, Central Bank Governor Indrajit Coomaraswamy said.
Coomaraswamy said the central bank had to buy about a 100 million dollars a month under an International Monetary Fund program, but it could buy about 150 million dollars, from forex markets a month in 2018.
"We feel we can purchase about 200 million dollars a month," Coomaraswamy told a forum at Ceylon Chamber of Commerce in Colombo.
"Even if we do 150 million dollars that is 1.8 billion US dollars."
The central bank bought as much as 200 million dollars net from forex markets a month in recent months.
Coomaraswamy said Sri Lanka ended 2017 with 7.9 billion US dollars up from 6.0 billion a year earlier, but reserves had fallen to 7.5 billion US dollars after large repayment to the Asian Clearing Union.
"It would not be entirely surprising if we could push up reserves to 10 billion US dollar by the end of 2018," he said.
The central bank intervened heavily in forex markets in 2017, buying 1.6 billion US dollars in forex markets keeping a soft dollar peg and mopped up (sterilized) the liquidity selling down domestic assets (treasury bills), reversing cycle of bill purchases and money printing in 2015/2016 or sterilized forex sales.
Sterilizing liquidity from dollar purchases by selling central-bank-held Treasuries to commercial banks, limits credit, economic activity and imports, helping reduce the outflows of forex, leading to a virtuous cycle of sterilized forex purchases.
The central bank had now run out of Treasury bills it bought to create the 2015/2016 crises.
Coomaraswamy said about 700 million dollars were due from the Hambantota port lease. Hambantota money is kept as dollars owned by the Treasury, and is monetary policy neutral (no pass through via domestic reserve money or sterilization is involved).
Sri Lanka could also raise up to 2.0 billion dollars from sovereign bonds, and another 500 million dollars from Sri Lanka Development Bonds, Coomaraswamy said.
While dollars earmarked for the budget will be spent and generate imports, any money kept as a dollar buffer will form part of the official (Treasury) reserves.
Governor Coomaraswamy said the central bank had also unwound 1.1 billion US dollars in forex swaps, reducing obligations of the central bank ending with about 1.6bn dollars in swaps.
A swap with a domestic bank, creates a forex risk for the central which is the same as a commercial bank borrowing dollars and lending rupees.
The central bank of Philippines, set up on the same lines as Sri Lanka under pressure from the US State Department and Treasury as part of the failed Bretton Woods system, collapsed partly due to forex swaps. (Colombo/Dec23/2018)