ECONOMYNEXT – Sri Lanka’s foreign reserves will at most fall to 6.2 billion US dollars by end-2019 due to the Easter Sunday attack, Central Bank Governor Indrajit Coomaraswamy said.
"At the start of 2019 we aimed reserves to be 8.2 billion US dollars," he told reporters in Colombo.
However, tourism inflows are projected to be 3.7 billion US dollars, compared to 5 billion US dollars at the start of the year, Coomaraswamy said.
He said around 300 million US dollars of the 1.3 billion US dollar fall are imports, leading to a 900 million US dollar hit to reserves.
Another 700 million US dollars in foreign direct investments will not come through, he said.
Coomaraswamy said another 300 million US dollars are expected to flow out of the bond market.
"So in the worst case, reserves will fall by 1.9 billion US dollars and we would end the year at 6.2 billion US dollars."
"But, we have managed with those levels before, so it is not a crisis," he said.
However other analysts say reserves – at least foreign assets of the central bank – are linked to monetary stability.
If the central bank sells down its Treasury bills, kills liquidity, whatever happens in the trade accounts or real economy, a surplus will be a created in the balance of payments.
If the central bank expands its domestic assets by printing money though deficit financing or lender of last resort operations, boost credit over and above the deposits and loan repayments of the banking system, the balance of payments will go into deficit.
This year bank credit is weak. To the extent that bank credit is weak, and credit is not expanded with printed money, central bank’s net reserves will go up.
Unless credit picks up, and large volumes of money is printed Sri Lanka is expected to register a balance of payments surplus. In any month where excess liquidity in the banking system goes up without money printing, the balance of payments is in surplus.
The year end reserve figure will also change due to the valuation of non-dollar assets (Euro, gold or yen holdings) and the interest earned on the foreign assets. (Colombo/Jun01/2019)