Sri Lanka forex reserves rise to US$7.29bn November after bond sale

ECONOMYNEXT – Sri Lanka’s forex reserves increased by 814 million US dollars to 7,295 million US dollars by end November 2015 from a month earlier, after a 1.5 billion US dollar bond sale.

Data showed that the Central Bank had taken in little over a billion US dollars from the bond sale into its reserves by effectively sterilizing the liquidity from the bond proceeds with a domestic asset sell-down on November 11.

However in the two subsequent weeks the monetary authority rejected real bids in weekly Treasuries auctions and repaid government debt with printed money, firing excess demand and credit in a ‘quantity easing’ type of move.

The increase of only 814 million dollars point to continued dollar sales to defend the currency as well as settlement of liabilities such as to the International Monetary Fund, which are monetary policy neutral.

Out of the 7.29 billion US dollars, 1.1 billion US dollars is from a six month swap from the Reserve Bank of India. Without the swap, reserves are at 6.29 billion US dollars.

In the last week, the monetary authority had mopped up some excess money printed during November, though domestic operations.

Any printed money not mopped up in money markets will hit the forex markets and has to be mopped up by dollar sales to prevent the currency falling. If the sufficient dollars are not sold to mop up the printed money the currency falls.

Loose monetary Central Bank has led to foreign reserve losses and the collapse of the rupee from 131 to 143 to the US dollars.

Sri Lanka has strong private and state credit growth, but instead of tightening monetary policy, the Central Bank had printed money especially in the short term money markets firing balance of payments pressure.

Sri Lanka has sought an IMF program to stabilize the runaway credit system. IMF said it was ‘considering options’ after Prime Minister Ranil Wickremesinghe said Sri Lanka is looking for an IMF program. (Colombo/Dec05/2015)

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