ECONOMYNET – Sri Lanka is seeking a billion US dollar repo from the New York Federal Reserve to boost dollar liquidity, Treasury Secretary S R Attygalle said as the island re-opened most economic activities after controlling Coronavirus.
The repo facility would be done by pledging Sri Lanka assets in the US, he said.
Sri Lanka had 6.49 billon US dollars by end May of which 4.52 billion US dollars were securities and 796 million US dollar were with other central banks and international agencies.
Most of Sri Lanka’s foreign reserves are in dollar securities as the intervention currency to operate the soft-peg is the US dollar.
Proceeds of the swap could be used to meet “contingent liquidity needs of the government,” the finance ministry said.
The central bank said it also advanced some dollars to banks through swaps and also acquired forex as market jitters worsened during the start of a global Coronavirus pandemic.
In the early days of the pandemic there were heightened counterparty risk perceptions in global markets, not just Sri Lanka.
Sri Lanka has also sought a 400 million US dollar swap from the Reserve Bank of India.
Sri Lanka’s rupee came under pressure in March 2020 after the central bank printed the largest volumes of money in its history amid a spike in private credit and deficit spending.
In April however private credit plunged.
In total about 1.3 billion US dollars in foreign reserves had been lost after the latest bout of money printing.
When money is printed and loaned out as credit, foreign exchange ‘shortages’ occur in a pegged exchange rate monetary system.
In Sri Lanka, like in other countries with balance of payments troubles, there is a strong belief system that currency troubles are in connected to imports, and not money and credit. (Colombo/July05/2020)