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Sri Lanka forex reserves peak as credit picks up

COLOMBO (EconomyNext) – Sri Lanka’s foreign reserves remained at 8.8 billion US dollars in October 2014, unchanged from a month earlier, but down from in August, official data showed.

Sri Lanka’s foreign reserves peaked at 9.2 billion US dollars in August, Central Bank data showed, with weak or negative bank credit leading to a build-up of rupee liquidity in the banking system.

Gross official reserves, made up of Central Bank and government reserves were equal to 5.5 months of imports in October.

Sri Lanka’s imports have also picked up after September 2014 with bank credit turning sharply positive.

In early September there was 371 billion rupees of excess liquidity temporarily sterilized through short term repo auctions or through the overnight window.

As the liquidity is loaned out, the exchange rate will come under pressure and reserves will be lost as the peg is maintained through foreign exchange sales which will mop up the rupees (unsterilized foreign exchange sales).

If the peg is not maintained though unsterilized foreign exchange sales both reserve losses and currency depreciation occurs.

By December excess liquidity was down to 351 billion rupees with  strong positive credit growth in September and October. Excess liquidity goes down when the total loans in a given period exceeds the deposits received by the banks.

Sri Lanka is now also seeing the repayments of about 600 million US dollars to the International Monetary Fund.

Unlike state debt repayments, which reduce domestic credit and demand, IMF repayments by the Central Bank are outside the domestic banking system and results in net reductions in foreign reserves.

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The Central Bank said Sri Lanka’s trade gap widened 4.3 percent to 6,785.8 million US dollars.

A trade gap is caused when proceeds of external inflows outside the merchandise trade account such as worker remittances, tourism, foreign direct investments and especially net foreign borrowings by the state are spent.

The Central Bank said remittances rose 8.7 percent to 5,689.7 million dollars foreign direct investments were 850 million US dollars and net inflows to the stock market 106 million US dollars.

Gross borrowings by the state were 4.59 billion US dollars, but a net figure was not given.
 

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