ECONOMYNEXT – Sri Lanka’s central bank is buying around 10 million US dollars a day from banks from the middle of February, Governor W D Lakshman said as the surrender requirements were imposed on banks to remittances and export receipts.
“Since around the middle of this month we have been purchasing about US 10 million roughly per day on average,” Governor Lakshman told a webinar by Veemansa, a Colombo-based policy advocacy body.
“Ours is an alternative approach to address this debt issue.”
Sri Lanka’s forex reserves dropped to 4.8 billion US dollars in February 2021, the lowest since October 2009 down from 5.6 billion dollars in December.
The central bank then ordered banks to sell to it 10 percent of remittance receipts and 12.5 percent of export receipts or half of a 25 mandatory conversion share.
Sri Lanka got over 7 billion US dollars in remmittances in 2020 and over 10 billion in exports.
Any dollars sold to the central bank would create new liquidity.
Meanwhile treasuries auctions are still failing aid prices ceilings and the central bank is buying up securities adding to excess liquidity in money markets.
Governor Lakshman said there was criticism of policy saying it was Modern Monetary Theory, but the ideas dated back longer in economic history.
Sri Lanka will settle all debt falling due this year including a billion US dollar sovereign bond and cut the ratio of foreign to domestic debt ratio from the current 43/57 to 33/67 over the medium term he said.
In order for a country running a current account deficit in the budget to repay foreign debt, dollars has to be bought from current account inflows by borrowing or taxing the rupee receipts or the central bank has to sterilize liquidity and reduce dollar outflows and buy them.
In 2020 there has been some squeeze on the current account amid weak private credit, but a large part of the debt repayments had been financed out of foreign reserves. (Colombo/Feb24/2021)