Sri Lanka forex interventions new high September amid money printing

ECONOMYNEXT – Sri Lanka’s foreign reserves rose only 331 million US dollars in September 2015 to 6,797.7 million US dollars despite a 1.1 billion US dollars borrowed from India, indicating continued reserve losses after a failed attempt to float the currency.

In September Central Bank has sold 523 million US dollars to the interbank market, the highest since the current balance of payments crisis began. The interventions do not include repayments to the International Monetary Fund or goverment foreign loans settlements.

The previous high of 491 million US dollars was hit in June. But in June there were large foreign borrowings by the state some of which were converted to rupees, requiring the currency to be defended even in the absence of money printing.

Sri Lanka’s foreign reserves without the 1.1 billion US dollar swap from the Reserve Bank of India, is now at 5,697 million US dollars, data from the Central Bank showed.

Sri Lanka also entered into a 6-month 400 million US dollar currency swap with RBI on April 30.

On September 04, Sri Lanka ended quoting a daily reference rate for the currency peg and the rupee slid from 134.75 to around 141.30 to the US dollar as money printing kept the pressure on the currency.

The latest indication are that the rupee has been re-pegged around 140-141 to the US dollar, analysts say.

Sri Lanka has been monetizing large volumes of debt to keep interest rates down and pay salaries of state workers, putting the currency under pressure.

Analysts have called for more prudent monetary policy and the monetary authority has come under fire for cutting rates in April despite and expanded budget deficit, heavily financed with domestic credit including central bank credit (money printing).

Over 70 billion rupees were printed in September alone, according to official data, to finance a budget deficit and keep interest rates down and to accommodate capital flight and state loan repayments.

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Economic analysts had warned against any attempt to float the currency without tightening monetary policy to end central bank financing of the budget deficit.

"If rates are not raised beforehand to slow credit before the float, the exchange rate will fall further than if rates were raised," EN’s economics columnist Bellwether wrote shortly before the attempt to float.

"Sri Lanka has little experience of this type of floating without a rate hike."

Analysts who track the monetary system closely say more reserve losses had occurred in the first ten days of October.

Sri Lanka has started to slap trade controls instead of tightening monetary policy, as expected by analysts who saw the BOP crisis coming more that 10 months ago. In the 1970 in addition to controlling imports, authorities have also imposed rationing and price controls, generating black markets instead of tightening monetary policy.

Analysts have called for reform of the Central Bank to make it more difficult for the agency to engage in imprudent policy or to abolish it altogether and return to a currency board arrangement.

Sri Lanka’s balance of payments trouble started with the setting up of a debt monetizing central bank in 1951 which attempts to target a soft-exchange rate peg and prints money at the same time to control interest rates. (Colombo/Oct10/2015)

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