Sri Lanka to sterilize Rs90bn in dollar sales with SRR cut
ECONOMYNEXT – Sri Lanka’s banks will get around 90 billion rupees of money (about 500 million dollars) from a reduction in deposits they must keep with the central bank, helping fill liquidity shortages that have emerged from defending a soft-peg with the US dollar and maturing swaps.
Deputy Governor K D Ranasinghe said about 90 billion rupees would be released into the banking system from a cut in the Statutory Reserve Ratio from 7.5 to 6.0 percent.
The liquidity will go to all banks based on their deposits, increasing the money available for credit and bond purchases including accommodating capital flight.
The new money is due to hit the banking system on November 16.
But the market is already short from previous forex market interventions and maturing swaps.
The overnight liquidity shortage rose to 103.9 billion rupees on November 15 from 82.9 billion rupees, a day earlier with a 20 billion rupee term reverse repo auction maturing.
The overall liquidity shortage was about 190 billion rupees (about 1.1 billion US dollars) which are also covered by term reverse repo injections, Ranasinghe said on November 14.
The money will be free of interest and will help boost margins on banks as they will not have to borrow from the reserve repo window at 9.0 percent or reverse repo auctions at close to the rate.
Analysts have pointed out that filling liquidity interventions with new liquidity, tends to generate new credit and imports, worsening balance of payments pressure.
In October interventions in the market were 303 million US dollars, up from 297.5 million dollar a month earlier based on official data, which does not indicate all interventions.
A float is required to break the cycle of interventions and liquidity injections.
Analysts and economists have called for the central bank to be abolished in favour of a currency board or dollarization to stop currency deprecation which is the key trigger of economic instability and a is a major source of poverty. (Colombo/Nov16/2018)