ECONOMYNEXT – Sri Lanka’s gross official reserves dropped to 6,005 million US dollars in February 2019, down 147 million dollars from 6,152 million US dollars in January 2019, official data showed.
Foreign reserves are down 1.9 billion US dollars from a peak of 7,914 billion reached in the current credit cycle which started with the end of a 2015/2016 balance of payments crisis.
Gross official reserves also includes fiscal reserves and do not consider monetary liabilities.
Net foreign assets of the Central Bank were down to about 4 billion US dollars by end-December.
Sri Lanka’s Central Bank stopped collecting forex reserves in February 2018, suddenly halting sterilisation auctions (to mop up inflows), taking the first steps to generate monetary instability.
In March, the Central Bank terminated term reverse repo deals it had entered into shortly beforehand, which analysts have likened to the Central Bank of Argentina, creating a secondary market for its own sterilisation securities to generate balance of payments trouble in that country.
In April, active money printing began with tens of billions of rupees printed to generate excess liquidity and enforce a rate cut. The Central Bank then let go of the peg with excess liquidity remaining in the system undermining the credibility of the peg.
Policy improved slightly with interbank markets being kept short with partially sterilised interventions and a rate hike in the second half of 2018, though permanent liquidity was injected via a reserve ratio cut.
The Central Bank depreciated the rupee from 153 to 180 to the US dollars in 2018 amid capital flight and exporter hold-backs with confidence worsened by a political crisis in October.
The Central Bank is still keeping interbank markets short with overnight or term injections to sterilise earlier interventions, which tends to support the rupee.
In February, the Central Bank was a net buyer of 29 million US dollars from the interbank market, reventing the rupee from floating cleanly and moving higher.
Data showed that the Central Bank had also bought 33 million dollars in January just as the currency stabilised with confidence returning to the market, while selling 36 million dollars to enforce convertibility undertakings in both sides of the peg, signaling to forex market participants about the latest level of the exchange rate that it was happy with.
In 2017, the Central Bank depreciated the rupee, apparently for real effective exchange rate (REER) targeting, despite mopping up inflows and generating a balance of payments surplus, amid weaker domestic credit.
Analysts have warned that as long as the Central Bank injects new money into the banking system while enforcing convertibility undertakings (pegging including a REER peg), it will not be able to collect forex reserves to repay debt.
In March, Sri Lanka sold a 2.4 billion US dollar bond, replenishing reserves that were used to repay loans. In January, reserves dropped due to loan repayments, although peg pressure had waned. (Colombo/Mar18/2019-SB)