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Sri Lanka forex reserves down to US$8.3bn, BOP surplus shrinks

COLOMBO (EconomyNext) – Sri Lanka’s forex reserves fell to 8.3 billion US dollars in November 2014, down from 8.8 billion US dollars in October, amid stronger private and state credit growth, Central Bank data showed as the country looks at a new program with the International Monetary Fund.

Sri Lanka’s foreign reserves peaked in August at 9.2 billion US dollars amid weak or negative credit growth and has since been falling steadily as domestic credit picked up.

From January to August the so-called balance of payments surplus the difference between total external receipts and payments – not counting investment flows of the central bank itself – rose to an estimated 2.1 billion US dollars, according to Central Bank data.

In the 11 months to November the BOP surplus fell to only 1.6 billion US dollars.

The Central Bank said in a monetary policy roadmap for 2015 that that 2014 was estimated to have ended with forex reserves of 8.2 billion US dollars and a BOP surplus of 1.4 billion US dollars.

On January 21, a 500 million US dollar sovereign bond was repaid with forex reserves.

Meanwhile there is a large volume of excess liquidity which is not permanently sterilized, indicating that further reserves losses will take place as the money is loaned out as credit.

Sri Lanka now has to repay about 500 million US dollar a year to IMF, which makes a dent in forex reserves, regardless of development on domestic credit and liquidity or state debt repayments.

Finance Minister Ravi Karunanayake said preliminary talks with an IMF mission began this month.

The government this week cut fuel prices, which means there will be more spending by citizens triggering more imports, rather than profits accruing to state energy utilities to be repaid to the banking system as excess liquidity or foreign reserves.

Further increases to state sector wages to be announced in a mini-budget on January 29, will also worsen spending, aggregate demand and imports, requiring an interest rate rise to avert potential balance of payments trouble.