ECONOMYNEXT – Sri Lanka’s gross official reserves had dropped to 6,652.8 million US dollars by the end of September 2020, from 7,430 million US dollars in August, central bank data showed.
Sri Lanka’s forex reserves are made up of central bank’s reserves and inflows to the Treasury from foreign borrowings.
In recent weeks the central had been able to buy dollars (against new rupees) from forex markets despite money printing due to weak private credit as well as import controls.
Import controls which hits trading businesses may also be contributing to the credit downturn.
Weak credit leads to a fall in private consumption and investment which in turn slows imports.
In September the central bank had bought 56 million US dollars in forex markets while selling 1.25 million dollars, down from purchases of 121 million dollars and sale of 28 million US dollars.
Economic analysts point out that when credit weakens monetary conditions automatically turn counter-cyclical in a pegged regime, leading to excess liquidity and rate falls.
In August private credit turned positive.
Sri Lanka however has a problem rolling over debt due to credit downgrades in the wake of tax cuts and March and April falls of the rupee.
In October, Sri Lanka repaid a billion US dollar sovereign bond, in part by using forex reserves.
Sri Lanka is expecting around 700 million dollars from China in October. (Colombo/Oct12/2020)