ECONOMYNEXT – Sri Lanka’s central bank has said a part of its gold holdings were sold to improve liquidity of its reserves, which had been going down from 2014.
In 2008, gold holdings were 92 million US dollars or 3.6 percent of gross officials reserves of 2.6 billion US dollars.
In 2021 gold reserves were reduced to 175 million US dollars which was 5.6 percent of gross official reserves of 3.1 billion US dollars.
By end 2014 when gross official reserves rose to 8.2 billion US dollars, gold reserves were increased to 893 million US dollars or 10.9 percent of gross official reserves.
“Hence, it is evident that the share of gold holdings in the reserve may change from time to time, reflecting the needs of the CBSL to buy, hold or liquidate its gold holdings in accordance with the prevailing reserve management priorities,” the central bank said.
The central bank said it would increase gold holdings when foreign reserves grow.
After the collapse of the Bretton Woods system in 1971 many central banks reduced their gold holdings.
Until 1971, the gold peg was an anchor or restraint on money printing that had kept monetary stability in countries like the UK and US for around 300 years. In order to stop the loss of god reserves, a gold standard central bank has to raise rates and stop printing money.
Countries which have dollar reserves also have to allow rates to go up when dollar reserves fall. However if money is re-injected (interventions are sterilized after ‘reserves are used for imports’) forex reserves will continue to dwindle until the peg is floated and/or rates are raised.
Countries like Canada (clean floating) and Vietnam (fairly consistent peg with the US dollar) have no gold reserves.
Clean floating central banks do not need any reserves for monetary restraint as liquidity injections (open market operations) are controlled by an inflation target. (Colombo/Dec11/2021)