Sri Lanka forex reserves tumble US$880mn in November
ECONOMYNEXT – Sri Lanka’s forex reserves dropped by 884.9 million US dollars in November 2018, to 7,018.38 million dollars amid a statutory reserve cut and more liquidity injections, official data show.
In November the central bank cut the statutory reserve ratio and injected what an official said was an estimated 90 billion rupees of cash at zero interest rate in to the banking system to permanently sterilize liquidity shortages generated by earlier interventions.
According to central bank data, interventions with commercial banks were 303.55 million US dollars in October. Meanwhile 7.0 million dollars had also been bought to stop the rupee from floating in that month.
The data does not capture forex reserves released through swap agreements to maintain a peg or transactions with the Treasury.
Sri Lanka’s credit system is vulnerable to balance of payments crises, as the central bank tries to maintain artificially low interest rates whenever the economy recovers and credit demand picks up, while operating soft-peg with the US dollar and collecting forex reserves.
In 2018, balance of payments pressure was generated from the first quarter of 2018 as the central bank halted mopping up inflows, terminated existing term repos in March and cut rates and actively printed money in April to boost excess liquidity. Currency pressure then triggers capital flight.
The finance ministry has meanwhile raised unpopular taxes, cut the budget deficit and in May also market priced fuel in another unpopular move, at great political cost. The finance ministry had also generated a primary surplus in the budget.
In November the central bank cut the reserve ratio, hiked policy rates to 9.0 percent and then injected money to sterilize interventions through reverse repo auctions at 8.35 percent after November 16, lower than the 8.7 percent the day before the SRR cut and lower than the earlier policy rate of 8.50 percent.
Economists and analysts have called for reforms of the central bank’s domestic operations, or its abolition in favor of a currency board or dollarization to end balance of payments crises in Sri Lanka, so that the country can progress.
Sri Lanka’s abolished a currency board in 1951 and set up a Latin America style soft-peg to join the Bretton Woods system, going in the opposite direction to countries like Singapore and Hong Kong and ending free trade to protect the soft peg.
The Bretton Woods system of soft-pegs also collapsed in 1971 as the US Federal Reserve tried to maintain artificially low interest rates to boost growth.
The US dollar was eventually floated amid massive gold reserve losses. (Colombo/Dec10/2018)