ECONOMYNEXT – Sri Lanka central bank’s foreign debt has exceeded reserves by 1.2 billion US dollars by October 2021 from around 780 million US dollars in October 2021, official data showed, amid continued low interest rates and liquidity injections.
The central bank reported gross reserves which includes government reserves of 2.26 billion dollars in October 2021.
The central bank owes about has about 1.4 billion US dollars on IMF loans about, and a negative special drawing rights allocation of about 859 million.
The central bank also has swaps and usually Asian Currency Union liability, which is settled periodically.
A central bank loses reserves when money is printed (domestic assets are acquired by printing rupees) and convertibility is provided to stop the exchange rate falling when the holders of the rupees demand dollars.
The dollar backing of the rupee is now a negative 19 percent.
Sri Lanka has been printing unprecedented volumes of money for monetary ‘stimulus’.
Sri Lanka opened several explicit ‘policy rates’ in 2020 and 2021 by imposing price controls on bill bond auctions, injecting large volumes of money to destabilize the credit system.
Money is usually printed to keep rates down and provide ‘stimulus’, which then ends up in the forex market.
Currencies fall when a pegged central bank is unable to give full convertibility to printed money (defend the peg) and there is balance of payments deficit (a fall in net international reserves) due to convertibility provided.
Sri Lanka stopped overt stimulus and reckless policy by lifting price controls on bond auctions, but is till injecting money after providing partial convertibility to oil imports and related items (sterilizing the balance of payments).
Sterilizing the balance of payments which analysts call the ‘Latin America clause’ is in Section 89 of the original constitution of the bank.
Sri Lanka has a central bank set up by a US money doctor in the style of several set up in Latin America modeled on Argentina’s 1935 central bank.
Many of them have defaulted on external debt after extensive sterilization of outflows, some have struck zero’s off the money, and several have gone completely bankrupt and the countries have dollarized or started new central banks with new currencies.
Analysts and economists have called for changes to the monetary law to remove sections that allow money printing and aggressive open market operations, or a currency board rule to ensure over 100 percent reserve backing like in Singapore and penalties for violating them.
Sri Lanka could also have inflation targeting rule but the central bank will then have to abandon foreign reserve collection. (Colombo/Dec05/2021)