ECONOMYNEXT – Sri Lanka’s forex reserves dropped 164 million US dollars in August 2023 to 3,598 million US dollars, ending several months of steady reserve gains, official data showed.
The central bank in August repaid a swap borrowed from Bangladesh’s central bank.
From around June 2023, after the the central bank shifted to an ad hoc peg regime, called a flexible exchange rate found in IMF prone countries, which tends to bust confidence and its pace of reserve collections dropped.
The strong inflow of funds into rupee bonds also stopped.
The ad hoc peg regime, analysts have warned, defies laws of nature, clearly described by classical economists.
The central bank also started complex open market operations, while overselling its Treasury bill stock.
Under IMF programs, currencies tend to collapse and reforms discredited as private credit recovers and rates are cut with inflationary open market operations (printing money) analysts have warned.’
Though official reserve assets have not grown, private bank reserves (or a net negative position) has improved.
However, before June 2023, when a fully IMF style confidence busting ad hoc pegged regime with widely see-sawing exchange rates came, the negative net position of both the central bank and private banks were improving simultaneously.
Analysts have warned that if rates were cut claiming that inflation was low, with inflationary open market operations. the central bank’s ability to collect reserves will wane.
In order to collect reserves from current flows – which is a net transfer of wealth out of the country – domestic credit from domestic savings has to be contained. (Colombo/Sept07/2023)