ECONOMYNEXT – Sri Lanka’s forex reserves rose to 6,745.8 million US dollars in May from 5,048 million US dollars in April, helped by government bond sale and dollar purchases by the central bank, official data show.
Sri Lanka raised a 1.5 million US dollar sovereign bond in May.
In May the Central Bank bought 183.47 million US dollars from commercial banks and only sold 35 million dollars to maintain a de facto dollar peg.
The central bank also buys dollars flowing into the government and helps keep the rupee down, build forex reserves and printing new money in return of the dollars keeping the rupee weak. However the official dollar data is not released.
In May however the central bank bought down its Treasury bills stock from about 300 billion rupees to 200 billion rupees, mopping up liquidity from dollar purchases in a so-called ‘sterilized foreign exchange purchase’.
When foreign exchange purchases are sterilized there is no pressure on the exchange rates and reserves can go up permanently as the rupees created by dollar purchases are no longer available to be given as credit by the banking system, which ends up holding Treasury bills previously held by the Central Bank.
The central bank generates balance of payments crisis by purchasing Treasury bills with printed money to keep rates down after defending eh peg (sterilized foreign exchange sales) or to finance deficits outright.
The central bank is also progressively unwinding its forex swaps, Governor Indrajit Coomaraswamy said in early June. (Colombo/June19/2017)