Sri Lanka forex reserves sharply down in November to US$5.3bn

ECONOMYNEXT – Sri Lanka’s forex reserves fell 695 million dollars to 5358 million US dollars in November 2016 from 6,053 million dollars a month earlier, official data showed.

Sri Lanka’s forex reserves are made up of central bank and fiscal reserves.

Fiscal reserves were boosted by a recent sovereign bond sale, but the funds were eventually expected to move out when foreign loans were repaid.

In addition the Central Bank also owes money to the International Monetary Fund, which it has to repay from forex reserves.

After being a net buyer of dollars from commercial banks up to September 2016, following a deal with the IMF and tightening of policy, the Central Bank became a net seller in October.

In November monetary policy loosened with the central bank sterilizing (offsetting or filling) liquidity shortages through outright purchases of Treasury bills, injecting cash outright, changing its earlier stance of sterilizing interventions with overnight cash.

A central bank that injects money even on an overnight basis, will generate credit and import demand, which will lead to a net outflow of dollars from the country, effectively generating a ‘foreign exchange shortage’.

There expectation of dollar inflows in January and March which can reverse the trend.

However if the central bank continues to inject liquidity, instead of withdrawing, the inflows will also go out as credit and imports.

A persistent fall in reserves indicates that domestic credit has to tighten.

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Analysts have warned that the current deal with the International Monetary Fund should have contained ceilings on the Treasury bill stock that the central bank can hold (Net Domestic Assets), which should be reduced every quarter as a performance criteria, given its past track record.

Instead the central bank was given a ‘monetary policy clause’ which gives the central bank more leeway to print money and put pressure on the currency.

The lack of a NDA target will make it more difficult for the central bank to collect reserves and lead to sharper weakening of the rupee.

ECONOMYNEXT’s policy columnist Bellwether warned in April 2016, that if the IMF program did not contain an NDA clause the rupee will weaken even after the deal.

Instead of collecting reserves by curbing domestic credit with an NDA target, collecting dollars by weakening the rupee leads to unsound money and the impoverishment of an entire population.  (Colombo/Dec09/2016)
 

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