COLOMBO (EconomyNext) – Sri Lanka’s forex reserves dropped to US dollars to 6,850 million US dollars in May 2015 from 7,454 million US dollars in April, official data showed.
The forex reserves are the lowest since March 2015, when total reserves fell to 6,835 million dollars, according to central bank data.
In April forex reserves recovered, partly helped by a 400 million US dollars swap with the Reserve Bank of India.
Under a central bank swap, the RBI gives dollars to the Central Bank of Sri Lanka and receives rupees. The RBI also receives interest from Sri Lanka under the swap agreement.
However the dollars have to be returned when the swap expires, or it has to be extended. Economic analysts say like IMF reserves, it is in the nature of a borrowed reserve.
The swap has no domestic monetary effect in Sri Lanka, according to officials.
A central bank mainly collects foreign reserves by selling an interest free obligation at par (domestic currency notes) and by accumulating profits earned on reserves.
The proceeds of a 329 million US dollar floating rate bond sold by the Treasury in the domestic market (about 43 billion rupees) in the last week of May was due on June 01.
In June the Central Bank appeared to have sold down nearly 42 billion rupees of Treasuries held in its stock, sterilizing excess liquidity and locking in the reserves if the dollars were converted.
But there is still over 90 billion rupees of excess liquidity in the interbank markets, making about 700 million US dollars of reserves vulnerable if credit remains strong in June amid low interest rates.
In June proceeds of a 650 million US dollar sovereign bond could reduce state pressure on credit markets and the banking system, but there are also loan repayments to be made.
Outflows may also go up if foreign investors sell rupee bonds or if loan repayments are made. There has been some sell-downs of foreign investor held domestic bonds.
The Central Bank itself also has to steadily repay IMF debt.
Analysts have warned that Sri Lanka’s current low interest rates are incompatible with government spending consumption and credit.