Sri Lanka’s IMF deal; central bank not to give forex cover for business

ECONOMYNEXT – Sri Lanka’s central bank has pledged not to provide foreign exchange cover for borrowers – who were mainly banks in the past – under a deal agreed with the International Monetary Fund.

"The CBSL (Central Bank of Sri Lanka) and the Government will also abstain from providing exchange guarantees for foreign currency borrowing," the economic and financial policies under an Extended Fund Facility with the IMF which approved in June said.

Analysts had warned for several years that the forward exchange cover provided by the central bank was a danger to its balance sheet.

This year the central bank made large losses despite the currency falling partly because it had large forex liabilities in the form of forward cover through swaps as well borrowings under a swap deal with the Reserve Bank of India.

Any kind of forex cover is usually given by fiscal authorities. But Sri Lanka now has large foreign borrowings and payments commitments due to a ratcheting up of foreign commercial borrowings over the past 10 years. (Colombo/June14/2016)

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