COLOMBO (EconomyNext) – Sri Lanka has no immediate need for balance of payments support though foreign reserves have been falling over the last six months, an International Monetary Fund official said.
Todd Schneider, who led an IMF mission to Colombo said the Central Bank should avoid excessive interventions in the forex markets, but exchange rate "does not appear to be out of line with fundamentals."
"We highlighted the need to cushion foreign exchange reserves and in this context emphasized the need for exchange rate flexibility," Schneider said.
Sri Lanka’s foreign reserves dropped to 7.2 billion US dollars in January 2015 as credit growth picked up from a peak of 9.2 billion US dollars in August.
Foreign reserves dropped party due to repayments to the IMF, the repayment of a sovereign bond and interventions.
Interventions however have been unsterilized, indicating that the dollar sales mopped up existing excess liquidity, and no new liquidity was created unlike in sterilized sales which leads to a balance of payments crisis.
Schneider said the balance of payments appeared to be "relatively robust" over the last few weeks.
Analysts say this likely points to a credit slowdown in February but the effects of a salary hike would be seen in the future.
There have however been concerns raised that a cut in fuel prices – which would reduce a windfall to the balance of payments – and new spending in a revised budget would pressure the exchange rate through imports.
Schneider however said the benefit from lower energy prices may outweigh the budget effects.
Sri Lanka is also planning a 1.5 billion US dollar sovereign bond.
He said there were no discussion about an IMF bailout and and the lender only gave money for countries in balance of payments difficulties.
But there were concerns over revenue targets in the budget, he said.