ECONOMYNEXT – Sri Lanka is expecting year end official foreign exchange reserves of 4.0 to 4.5 billion US dollars helped by inflows without counting a swap from China, Central Bank Director of Economic Research Chandranath Amarasekera said.
“We think by the end of 2021, we will be able to keep gross official reserves between 4.0 to 4.5 billion US dollars,” he told reporters.
“There is a chance that it can go higher. For this we have not counted the 1.5 billion US dollar swap from China.”
By end May Sri Lanka’s gross official reserves were at 4,018 million US dollars from 4,479 million in April.
The reserves would be equal to about 3 months of imports, he said. The Chinese swap would amount to another month, he said.
Central Bank Governor W D Lakshman said 400 million dollar swap from India was expected in August. Another 250 million dollar swap was expected from Bangladesh. Bangladeshi media reports have referred to a 200 million US dollar swap.
The swaps from the People’s Bank of China would be drawn down i, he said.f the need arises
A 785 million dollar allocation of special drawing rights, a ‘reserve assets’ developed by the International Monetary Fund is also expected to be made by August, Amarasekera said.
The central bank also expecting to buy 700 million dollars from the forex market.
“A country can go forward by with inflows from exports and foreign direct investments,” Amaraseskera said.
“Until then in 2021 and in the first part of 2021 we expect these other inflows.”
Analysts based using classical economic principles however have warned that as long as liquidity is injected (money is printed through Treasury bill purchases) by a pegged central bank, which are then loaned out by banks, there will be foreign exchange outflows in excess of inflows.
To build forex reserves liquidity generated by central bank dollar purchases has to be mopped up so that the banks cannot loan the proceeds to the overall economy to generate consumption or investment.
By June 14 excess liquidity in money markets were 110 billion rupees, requiting over 500 million US dollars to mop them up to maintain a peg at 200 to the US dollar.
The central bank has not been defending current transactions a lot, but has mainly been giving dollars for financial account outflows. It is not clear whether reserves were being sold to the Ceylon Petroleum Corporation.
Under long-standing Mercantilism however the CPC had been forced to borrow dollars and run an unhedged dollar exposure whenever liquidity injections pressure the peg, analysts have said.
In April, a month when remittances and exporter conversions were strong the government got a 500 million US dollar loan from China Development Bank, the central bank bought 62 million US dollar from markets.
The central bank has been primarily injecting liquidity by setting a ceiling rate for Treasury bill auctions and printing money to purchase bills and target a yield curve up to 12 months. (Colombo/June14/2021)