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Tuesday May 11th, 2021

Sri Lanka foreign reserves at US$7.2bn: Finance Minister

COLOMBO (EconomyNext) – Sri Lanka’s foreign reserves were now at 7.2 billion US dollars, Finance Minister Ravi Karunanayake said Monday.

His comments came after Prime Minister Ranil Wickremesinghe told parliament on March 17, that Sri Lanka’s foreign reserves were 6,175.3 million US dollars by March 13, which is sharply down from figures reported earlier.

According to the last published data, Sri Lanka’s official reserves were 7,428 billion US dollars on February 28, which was up from the January total of 7,252 million US dollars.

Prime Minister Wickremesinghe was responding a question from Opposition Leader Nimal Siripala de Silva.

It is not clear whether he was referring only to foreign reserves without gold holdings, though liquidity data points to a fall of some reserves in March. Gold holdings were about 866 million US dollars in February down from 902.9 million US dollars in January.

Amid sharp rise in the underlying value of the dollar, gold, energy and good commodities have ‘fallen’ in price, with some economists predicting a return of 1980s style Greate Moderation (Great Moderation 2.0: The Russian ruble, Sri Lanka’s tea and rubber: Bellwether).

The Central Bank also has assets in currencies such as Euro, despite having a de facto peg to the US dollars generating large valuation losses in times of global currency turmoil.

Prime Minister Wickramasinghe told parliament that the Central Bank had not given 124 million US dollars to the government as queried by the Opposition Leader.

In reality however, the Central Bank which settles foreign loans, effectively appropriates reserves on behalf of the government. Foreign reserves dropped in January partly due to a repaying a maturing sovereign bond.

Sri Lanka’s foreign reserves which peaked at 9.2 billion US dollars have been under pressure after credit growth picked up in August and repayments to the International Monetary Fund and analysts have warned that the Central Bank should permanently sterilize excess liquidity to safeguard reserves amid stronger credit growth (Sri Lanka may lose forex reserve beauty contest amid ultra-low interest rates).

Analysts who watch banking sector liquidity levels estimate that credit growth in February was weak, but higher state spending kicks after salary increases of state workers and cut in fuel and other taxes.

With over 240 billion rupees of excess liquidity remaining, another 1.8 billion US dollars of reserves are at risk analysts say.

Though reserve attrition through non-sterilized interventions do not point to a serious balance of payments crisis that cannot be corrected with rate hikes, foreign investor perceptions may be swayed by the total reserves outstanding.

The Rajapaksa regime planned a 1.5 billion US dollar sovereign bond for January. Central Bank Governor Arjuna Mahendran told EconomyNext that Sri Lanka would go to international markets soon after a revised budget in February, but it did not happen, and yields have since risen.

An IMF mission to the country appeared to be fairly complacent about the balance of payments but warned over state revenues.

Other analysts however warn that fiscal gaps are strongly linked to the BOP through the possibility of Central Bank accommodation.

However domestic interest rates have moved up, which analysts say will generate more savings and help finance the deficit, and help counter some of risks.

Updated and recast with comments from Finance Minister who said foreign reserves were US$7.2bn.

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