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Sri Lanka forex reserves rise to US$7.9bn in Jan 2020 before rate cut, profit transfer

ECONOMYNEXT – Sri Lanka’s forex reserves had grown to 7,948 million US dollars in January 2020, from 7512 million US dollars ahead of a rate cut and central bank profits transfers to the Treasury, official data show.

Sri Lanka gross official reserves are made up of central bank reserves and balances of the Treasury, kept for debt repayment.

In January private credit was zero, data showed, while there was a surge in credit to government.

The central bank was a net buyer in forex markets in January purchasing 149 million US dollars to stop the appreciation of the rupee, while selling 60 million dollars keep it from falling in the course of operating a soft-pegged exchange rate regime.

Sri Lanka operates a soft-pegged exchange rate, which can be de-stabilized at any time as credit picks up and money is injected to narrowly target a call money rate.

In January however the central bank had withdrawn cash on a net basis, with net central bank credit falling to 335.1 billion rupees by end January from 363.0 billion in December.

In December there is a seasonal increase in real cash demand, which critics say now tends to be over-accommodated due to narrowly targeting a call money rate.

On January 30, the central bank cut policy rates, pushing down the targeted call money rate by 50 basis points.

However the fall in domestic assets show that at least in January, money was not being injected to enforce the earlier rate.

In 2015 and 2018, rates cuts in April, which were made while money was being printed to enforce the earlier rate corridor, triggered a loss of credibility of the peg and currency crises, which led to falls in economy growth and structurally higher interest rates.

Such rates which also trigger capital flight have been labelled the ‘unkindest cut’ by critics.

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In February the central bank had also transferred profits of 24 billion rupees, pushing up excess liquidity, which if loaned out by banks, will lead to either a fall in the currency or a loss of forex reserves if the peg is defended.

The central bank has only been mopping up the profit transfer through temporary operations, leaving the money to be loaned out if credit growth picks up. (Colombo/Mar08/2020)

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