ECONOMYNEXT – Sri Lanka’s Central Bank had bought $131.29 million from commercial banks and sold $15.2 million in September, helping keep the rupee from appreciating, official data shows.
The Central Bank also buys dollar inflows to the Treasury, but the data is usually not released.
The Treasury is usually a net borrower abroad (net exporter of debt) and is a key driver of Sri Lanka’s trade deficit. When net borrowings are spent domestically, such as for construction projects, the trade deficit expands.
In August also, the Central Bank bought $190 million from commercial banks and sold $57 million.
The purchases show that the Central Bank is not printing money on a net basis, forcing the sale of foreign reserves to ‘mop up’ rupees.
But Sri Lanka’s forex reserves fell $6.46 billion in September from $6.58 billion (adjusted) in August.
Official reserves includes balances in the Treasury. A fall in forex reserves (without passing through the reserve money) can happen due the use of Treasury funds to repay loans. It can also happen when central bank reserves are used to repay old International Monetary Fund loans.
Analysts say it indicates that domestic credit has to slow further (or rates to go up) to allow the balance of payments to be stable, given the current IMF repayments and government net loan inflows. Commerical banks are pushing up rates and trying to raise more deposits. (Colombo/Oct17/2018)