Sri Lanka forex reserves down to US$6.46bn September

ECONOMYNEXT – Sri Lanka’s forex reserves fell 138.8 million dollars from a month earlier to 6.46 billion rupees in September 2016, from 6.598 million dollars, official data shows.

Official reserve assets include central bank’s monetary reserves and also fiscal reserves held by the Treasury.

Since monetary policy was tightened from around the first quarter of 2016 and the central bank stopped printing money to generate excess liquidity in money markets (finally sterilizing interventions more than 100 percent), the rapid haemorrhaging of forex reserves stopped.

The central bank has instead finally sterilized interventions less than 100 percent by providing overnight liquidity to money markets, forcing banks to raise deposits finance their loans, instead of getting printed money by converting treasury bills to money.

The central bank was also able to buy dollars from forex markets over the past several months as its Treasury bill stock was sold down.

Market sources indicate that several banks have chosen to unwind swaps with the central bank and repay foreign loans.

Analysts say if forex reserves continue to go down, interest rates may have to be raised or Treasury bill sold down aggressively. With domestic government borrowings reduced in the last quarter of 2016, Treasuries yields have fallen.

Fiscal reserves go down when government loans are repaid. Monetary reserves go down when loans to the International Monetary Fund are repaid.

Sri Lanka owes money to the IMF on past loans. However monetary forex reserves also go up with interest earnings and go down with valuation changes between reserves assets such as movements of the Euro versus the US dollar. (Colombo/Oct09/2016)
 

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