Sri Lanka’s forex reserves drop to $6.0 billion in April

ECONOMYNEXT – Sri Lanka’s forex reserves dropped to $6,070 million in April 2016, down from $6,225 million in March, official data showed, but monetary policy had improved from March.

Sri Lanka’s forex reserves without a $1.1 billion swap from India is now down to $4.97 billion, lower than the $5.52 billion seen in February 2012, during the last balance of payments crisis.

Although forex reserves dropped $154 million in March, Sri Lanka’s monetary policy has improved from 2015 when the Central Bank generated the latest balance of payments crisis with a rate cut in April and printing money after failed Treasury bill auctions.

From about the third week of March, the Central Bank stopped printing money through permanent purchases of Treasury bills and started injecting liquidity overnight to cover shortages, forcing banks and primary dealers who may borrow printed money to raise real deposits.

The market has been kept generally ‘short’ from the last week of March.

In April, when seasonal money demand is high, the Central Bank also injected cash overnight, in another improvement of policy.

The last large scale printing of money through failed Treasury bill auctions were seen in the second half of February 2015, which led to intensified currency defence in March.

If the Central Bank does not sell reserves to ‘mop up’ the excess rupees printed through failed Treasury bill auctions or overnight cash injections, the rupee will fall. Currency defence rose to $421 million in March from $189 million in February.

Currency defence numbers do not match forex reserve falls because inflows into the Treasury are surrendered to the Central Bank in the throes of a balance of payments crisis.

Analysts have identified the practice as one of the reasons for a delayed recovery from the BOP crisis, despite general interest rates moving up.

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