Sri Lanka ends 2016 with US$6.062bn in forex reserves

ECONOMYNEXT – Sri Lanka ended 2016 with 6,062 billion US dollars in forex reserves, up 418 million dollars from November’s 5,644 million dollars but down from the January level, official data show.

Forex reserves in December was down 1,229 million dollars from 7,292 million dollars in January.

The central bank started 2016 with 79 billion rupees of Treasury bills in its holding but printed money steadily up to mid-March to keep interbank markets flushed with liquidity.

From around March 20th the central bank started to inject cash overnight instead of buying securities outright, in a major tightening of policy.

But by that time the Treasury bill stock had gone up to 193 billion rupees, and forex reserves had already fallen by a billion US dollars to 6.2 billion US dollars.

On April 01, the Treasury bill stock jumped to 250 billion rupees and the central bank injected cash steadily over the month.

Leaked data revealed that in addition to the usual April holiday requirements, Perpetual Treasuries, a primary dealer had used tens of billions of printed money from central bank facilities to buy long bonds.

Over August the central bank steadily sold down its Treasury bill stock, building up forex reserves. Net credit to government fell from 456 billion rupees to 396 billion rupees over the month and net foreign assets rose from 416 billion rupees to 499 billion rupees.

A central bank that prints money to inject liquidity to banks by purchasing Treasuries on their balance sheets with printed money, gives new reserves which can be loaned out, generating excess demand and imports and ‘foreign exchange’ shortage.

A central bank that withdraws liquidity from money markets by selling down its domestic asset portfolio will slow credit and imports and generate a ‘surplus of foreign exchange.’

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When the new rupee hit the forex markets, forex reserves have to be sold to keep the rupee from falling.

In November analysts warned that policy deteriorated again with the central bank buying Treasuries outright for periods up to 280 days, influencing bond rates down.

Analysts warned that influencing long term yields down gives excessive profits to jittery foreign bond holders who want to exit and encourages them to exit.

Officials said forex reserves grew in December with multilateral funding coming to the Treasury and also through swaps entered into with domestic banks.

Fiscal balances of foreign exchange also count as official reserves, though they are monetary policy neutral and does not have a direct connection with domestic credit conditions.

The International Monetary Fund has asked the Central Bank not to engage in swaps, and to wind down outstanding contracts. (Colombo/Jan07/2016)
 

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