Sri Lanka foreign reserves rise to US$7.29bn in November after bond sale

ECONOMYNEXT – Sri Lanka’s foreign reserves rose to 7,295 million US dollars in November 2015 from 6,480 million dollar a month earlier, following a sovereign bond sale, official data showed.

The 1.5 billion dollar bond sale increased reserves by only 814 million US dollars.

The central bank sterilized a large part of the rupee proceeds of the bond sale on November 04 to build up forex reserves but money was later printed by rejecting bids at Treasury bills auction, to boost credit and demand.

The Treasury bills were repaid with printed money to keep interest rates artificially down, a practice which results in excess demand, excess credit and excess imports leading to a loss of reserves when the currency is defended or a collapse of the currency if it is not defended.

In November dollars sales to commercial banks were 306 million dollars. This does not include official dollar purchase from bond sales or loans to government, which is the key tool used to maintain the de facto dollar peg.

An attempted ‘float’ of the currency is September 2014 failed and ended in a devaluation style collapsed of the currency. Some analysts have said Sri Lanka’s monetary and fiscal policies are the worst seen since 2004.

In September 523 million dollars were sold and in October 305 million dollars.

Sri Lanka has a de facto unstable peg with the US dollar and buys dollars in forex markets to prevent the rupee from floating up, but its policy of printing money and keeping rates down in the face of high credit is incompatible with maintain the currency floor.

When the US Fed raised interest rates earlier this month, Hong Kong which has a hard peg or currency board to the US dollar raised its de facto policy rate.

Other countries with stable pegs including UAE and Saudi Arabia also raised its base rates by 25 basis points.





Middle Eastern nations have seen sharp falls in government tax revenues as oil prices fall with a strengthening of the US dollar. (Colombo/December27/2015)


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