Sri Lanka forex reserves drop to US$7.26bn in January 2015

COLOMBO (EconomyNext) – Sri Lanka’s official foreign reserves have dropped to 7,261 million US dollars in January 2015 from 8,208 million US dollars in December 2014, amid strong credit growth and the repayment of a sovereign bond, official data showed.

Sri Lanka’s forex reserves have dropped from a peak of 9.2 billion rupees reached in August 2014 due to weak credit growth, but has started to fall with a pick-up in credit. (Sri Lanka forex reserves down to US$8.3bn, BOP surplus shrinks)

Analysts have pointed out from late last year that the Central Bank must mop up excess liquidity the banking system permanently if it wanted to safeguard reserves and also allow market interest rates to move up (Sri Lanka may lose forex reserve beauty contest amid ultra-low interest rates- Bellwether).

At the moment about 285.8 billion rupees of temporarily sterilized excess liquidity remains in the system, which is likely to be loaned out as credit over the next year, unless mopped up permanently.

As result about 2.1 billion US dollars of foreign reserves will have to be lost over the next few months to credit growth, unless the excess liquidity is mopped up permanently and rates raised.

Sri Lanka’s reserves have dropped partly due to high credit growth eating into excess liquidity but reserve growth had been under threat from earlier due to repayments made to the International Monetary Fund.

A January budget, which raised public sector salaries from February is also expected to boost consumption and worsen pressure on the credit system.

But Sri Lanka is expected to go to markets for a 1.5 billion US dollar bond soon, which will replenish some of the reserves.