Sri Lanka forex reserves recover to US$6.7bn in June: Central Bank

ECONOMYNEXT – Sri Lanka’s forex reserves have recovered to 6.7 billion US dollars in June from 6.49 billion US dollars in May helped with purchases in the market and rupee-dollar swaps amid import restrictions, officials said.

Sri Lanka’s rupee collapsed to close to 200 to the US dollar after a spike in private credit in March fired by liquidity injections and a panic-inducing ‘flexible exchange rate’ where interventions are minimized after printing money allowing the peg to fall and panic importers into an early covering of bills.

In April private credit fell and there was a pick-up in May. The central bank sold 174 million US dollars to partially defend the peg in March and 98 million US dollars in April.

In April private credit fell to 12 billion rupees but it picked up to 30 billion rupees in May.

In May the central bank bought 61 million US dollars to prevent appreciation, data show.

“By today or tomorrow our net intervention would be zero,” the Central Bank’s Director of Economic Research Chandranath Amarasekera said.

He said the other reserve decline was due to debt repayments.

The currency collapse triggered sweeping ‘Nixon shock’ style import controls not seen since the 1970s.

The central bank funded the budget with printed money and targeted the overnight rate pumping excess liquidity into the banking system.

Central Bank Governor W D Lakshman said the import controls helped keep the value of the rupee.

“However the restriction on imports and investments abroad, allowing with gradually recovering inflows had helped keep the exchange value stable during the past three months,” Governor Lakshman said.

Countries that do not print money like Sri Lanka including Thailand and Vietnam have seen their currencies stabilize or appreciate as credit and consumption weakened, while countries, where money printing is banned by law such as Singapore and Hong Kong, has strengthened.

Hong Kong which operates a currency board at 7.8 to the US dollar saw the currency hit the upper trading band around 7.79 to the US dollar in the first week of March and is now trading at 7.74 on the lower trading band.

Countries with working monetary regimes do not have import or exchange controls. (Colombo/July09/2020-sb)