Sri Lanka forex reserves drop to new low of US$5.6bn in May

ECONOMYNEXT – Sri Lanka’s gross official forex reserves dropped to a new low of $5.62 billion in May 2015 from Rs6.06 billion in April, a month before the International Monetary Fund approved a new loan to the country’s central bank.

The $5.6 billion in forex reserves include $1.1 billion borrowed by the monetary authority from the Reserve Bank of India and $310 million borrowed from the IMF under earlier deals.

Reserves after borrowings from the RBI and IMF is $4.2 billion, the lowest level seen during the current balance of payments crisis.

In February 2012, during the last balance of payments crisis generated by the central bank, gross reserves were $6.7 billion and included about $1.7 billion borrowed from the IMF.

Reserves after IMF borrowings were around $5.4 billion in February 2011.

After selling about $251 million to commercial banks in April, data showed that the Central Bank had bought $87 million from the market in May. The Central Bank also buys dollar inflows to the government, which is not captured in the data.

Economic analysts had said that, in May, the Central Bank did not print large volumes of money, reducing pressure on the balance of payments and the rupee.

The Central Bank puts pressure on the rupee and generates balance of payments crisis by printing money to buy large volumes of Treasury bills, which then spooks foreign investors and exporters.

Without failed Treasury bills auctions, which boosts domestic credit to unsustainable levels, it is not possible to generated sustained pressure on the rupee.

Gross official reserves also include fiscal reserves. The government may collect dollar inflows and settle foreign loans without resorting to monetary reserves. The government may also appropriate forex reserves from the Central Bank for Treasury bills.





Such transactions, while reducing reserves, does not alter the domestic monetary base and has no effect on the currency or domestic credit.

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