ECONOMYNEXT – Sri Lanka’s central bank has been able to buy 950 million US dollars more from commercial banks than it sold so far in 2023, according to International Monetary Fund documents.
“Thus far in 2023, the CBSL has been able to purchase over US$ 950 million on a net basis towards building up reserves, ” Krishnamurthy Subramanian, Executive Director for Sri Lanka and Chandranath Amarasekara, Alternate Executive Director said in a statement released with IMF documents.
In 2023 the central bank has to buy 1.4 billion US dollars to build foreign reserves under the IMF program.
The central bank net reserves are now negative due to dollars borrowed to push unsustainable private imports as liquidity was injected to offset interventions and keep its policy rate artificially down.
Sri Lanka’s high interest rates and price reforms to state enterprises, as well as reduced budget deficit has reduced domestic credit to levels below loans repayments and new deposits, allowing the balance of payments to turn into surplus.
When credit is negative and external outflows are below inflows (there is balance of payments surplus) a central bank can easily control an exchange rate or appreciate it.
However, any purchases above that allowed by domestic credit developments (the net sale of sterilization securities in to a domestic banking system or voluntary private sector sterilization) can push the currency down.
East Asian pegged monetary authorities create almost permanent BOP surpluses by steadily selling sterilization securities (MAS bills/HKMA Exchange Fund bills and notes/Bank Negara paper/PBOC paper) and not obstinately maintaining short term rates through inflationary open market operations like Sri Lanka, Latin America, as well as other sovereign defaulting countries with collapsing flexible exchange rates, analysts say.
When credit is negative, the new money created by central bank purchases does not immediately come back to the forex market, allowing a reserve collecting pegged central bank to mop it up by the sale of sterilization securities.
At the moment Sri Lanka’s banking system has liquidity shortages from previously lost foreign reserves, which were filled with overnight open market operations as well as a high level of voluntary private sector sterilization through money deposited in the central bank’s overnight standing facility.
Thought access to the facility has been limited in a subsequent decision, banks are still keeping their money overnight in their RTGS accounts instead of lending, helping build up reserves.
If they star buying Treasury bills with the money or domestic credit picks up, the excess dollars available in the forex markets would reduce. (Colombo/Mar22/2023)
If the central bank buys USD from the open market,
that means they are interfering with the floating Forex market.
They should allow appreciating the value of the rupee.
Their approach is completely wrong.
We are sure to market fundamentals will not allow this attitude
because they will not be able to sell the exchange without
reducing the present market price.