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Sri Lanka forex reserves rise to US$7.4bn in Aug 2020

ECONOMYNEXT – Sri Lanka’s forex reserves had risen to 7,440.5 million US dollars in August 2020 from 7,095.8 million US dollars in September 2020, with the central bank buying a net buyer of dollars in forex markets amid negative private credit, data showed.

In August the central bank bought 121 million US dollars to stop the appreciation of the rupee amid weak private credit in the earlier month, and sold 28 million dollars to defend a soft- peg around 185 to the US dollar.

In July the central bank bought 162.5 million dollars from commercial banks.

Inflows to the government are not reflected in the data. Last month the central bank also borrowed 400 million US dollars from the Reserve Bank of India.

Sri Lanka has to repay a billion US dollar sovereign bond in October. Central Bank officials have said that only 2 billion US dollars of loans remains to be repaid in 2020.

Sri Lanka has a central bank which is one of a series built in Latin America and Asia by the Federal Reserve in the 1940s and 1950 inspired by the founder of the Argentina central bank, Raul Prebisch, analysts have shown.

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The raison d’être of the central banks are to inject liquidity to sterilize the balance of payments to boost demand.

Whenever private credit picks up, the action then triggers a currency crisis as in Latin America.

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Sri Lanka’s rupee fell close to 200 to the US dollar after unprecedented money printing in March and April 2020, but has since appreciated amid private credit and import controls.

In August, a newly elected parliament approved an interim budget for the rest of the year. It is not clear whether government borrowings will accelerate.

In general the rupee comes under pressure when the central bank injects money to keep rate down. However after 2015 open market operations have got highly aggressive with the call money rate being targeted and a policy corridor being abandoned leading to currency crisis coming close together.

Analysts have called for reform of domestic operations to avoid monetary instability and possible sovereign default. (Colombo/Sept12/2020)