Sri Lanka sees rupee bond sales by foreigners amid reserve drop

COLOMBO (EconomyNext) – Sri Lanka has seen rupee bond sales by foreigners in the latter part of the year as foreign reserves also dropped due to repayments to the International Monetary Fund and a pick-up in bank credit.

Central Bank Governor Nivard Cabraal said a sell-down in foreign holdings of rupee denominated bonds had been ‘encouraged’ to reduce short term liabilities as a proportion to total foreign reserves.

Sri Lanka maintained an approximate ceiling of 12.5 percent of foreign holdings to the total outstanding rupee denominated Treasury bills and bonds.

Central Bank Governor Nivard Cabraal said it had ‘eased gradually’ to 11.2 percent by year end.

"This was aimed at improving the ratio of foreign reserves to short-term liabilities of the country," Cabraal said presenting a road map for monetary policy on Friday.

Foreign holdings of Treasuries which was 507 billion rupees on August 06 (12.8 percent of total) fell by 49.9 billion rupees to 457 billion rupees by December 31 (11.17 percent), Central Bank data show.

Sri Lanka’s foreign reserves which peaked at 9.2 billion US dollars in August had also fallen by around about a billion US dollars by year end to 8.2 billion US dollars.

Analysts had warned that the central bank would find it difficult to build reserves as the equivalent of about 2.5 billion dollars of reserves were held back by temporarily sterilized rupee excess liquidity which would be loaned out as credit growth picks up (Sri Lanka may lose forex reserve beauty contest amid ultra-low interest rates – Bellwether).

In addition the Central Bank also had to fork out about 500 million dollars a year to the International Monetary Fund as repayments and annual profit transfers to the Treasury also took their toll on reserves.

Analysts had urged the Central Bank not to make profit transfers to the Treasury this year, which would pump more liquidity into the banking system, resulting ultimately in more foreign reserve losses.





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