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Sri Lanka to have 'Goldilocks' reserves, IMF deal talks ahead
03 Jan, 2013 11:33:57
Jan 03, 2013 (LBO) - Sri Lanka will not accumulate too much foreign reserves, but will maintain an amount that is comfortable for the economy and a deal with the International Monetary Fund is also on the cards, Central Bank Governor Nivard Cabraal said.
Sri Lanka would have collected with about 6.8 billion US dollars of foreign reserves by the end of 2012 which is equal to about 4.4 months of imports, estimates by the Central Bank showed.

"During the year our foreign reserve accumulation was prudent, not too excessive," Cabraal said Wednesday.

"We did not want to go into a situation where we had 7 or 8 months of reserves. At the same time it was not too slow either."

Cabraal said he was reminded about the story of Goldilocks and the three bears, where she was comfortable in the bed of baby bear.

"Sometimes it is not easy to find the exact level of comfort that is needed," Cabraal said.

"I think we have got the right balance. Not too much, not too little. We will be looking at it carefully and moving on we will ensure that Goldilocks is comfortable."

By end November 2012 Sri Lanka had 6.49 billion US dollars of reserves or about 4.1 months of reserves.

Sri Lanka's reserves are above its monetary base of about 490 billion rupees (3.8 billion rupees) indicating that the Central Bank could exchange its rupee liabilities at any time for dollars with cash to spare.

A country that does not sterilize interventions only needs a little more reserve than the monetary base to buffer any cross currency losses.

But a monetary authority that sterilizes interventions with fresh liquidity can bust up large volumes of foreign reserves in a few months.

Sri Lanka's central bank runs a soft-pegged exchange rate regime and engages in sterilized foreign exchange sales, creating fresh liquidity to offset interventions. During the most recent crisis, Sri Lanka lost about two billion dollars of foreign reserves.

Sri Lanka also measures months of imports on past data, which may tend to overstate the comfort level.

The country has also accumulated large volumes of short term debt, especially rupee denominated Treasuries, which can leave the country at any time. Countries that sterilize foreign exchange sales need to have sufficient reserves to cover short term debt.

During the last balance of payments crisis the Central Bank was able to persuade foreign investors to stay on until corrective measures were put in place.

Cabraal said Sri Lanka had taken its first IMF program to its completion. IMF programs are useful to give direction and also comfort investors.

"Discussions will take place this year to see how our relationship will progress in the future," Cabraal said.

"We would be approaching it from a point of view of ensuring that we will have partnership with the IMF particularly in these times where the world economy is going through a very difficult time."

An IMF team is expected to come on a two week mission in the first half of February to discuss an extended facility and also the annual Article IV consultations.

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