Sri Lanka banks on higher aid flows to prop its rupee and foreign reserves

Sri Lanka is banking on higher foreign aid inflows to lift the rupee from its doldrums and replenish country reserves that dissolved rather quickly after high crude oil prices blew a hole in its balance sheet. Sri Lanka is banking on higher foreign aid inflows to lift the rupee from its doldrums and replenish country reserves that dissolved rather quickly after high crude oil prices blew a hole in its balance sheet. The island nation’s gross official reserves have picked up to US$ 2,080 mn as at Dec 10, after falling down to US$ 1,929 mn as at end October, the Central Bank said Wednesday, following its monthly monetary policy review.

Besides pocketing US$ 100 mn from Sri Lanka Telecom’s international bond issue, the Treasury also booked foreign aid from Japan (US$ 100 mn) and the ADB (about US$ 35 mn). The government has also started to tap into a US$ 150 mn Indian credit line while a further US$ 150 mn credit facility is also due from Iran.

“The overall balance of payments (BOP), which recorded a deficit of US$ 245 mn in the first nine months of 2004, is expected to improve significantly by the year end due to foreign loan disbursements,” the bank said.

The Sri Lankan rupee has fallen some 8.9 percent todate, closing at an all time low of Rs. 105.35 against the greenback on Tuesday.

The currency has come under pressure after a 14 percent hike in its import bill, due to petroleum and imports of textiles to keep its apparel trade ticking.

At Tuesday’s meeting, the bank kept the overnight repurchase (repo) and reverse repurchase (reverse repo) rates unchanged at 7.5 percent and 9.0 percent respectively.

The repo-rate or the repurchase rate is the key benchmark, which sets the floor in the overnight call money market, as it enables lenders to invest excess funds in treasury bills and bonds held by the Central Bank (i.e. at near zero risk). It is also the Central Bank’s main instrument of signalling the expected direction of overall interest rates to the market.

The repo window acts as the lender at last resort for commercial banks for their trading activities, backed by their government security holdings.

Market players are expecting the bank to raise short-term rates by 20-30 basis points early next year, to keep in line with inflation.

Inflation as measured by Colombo Consumer Price Index has risen to a high of 6.8 percent in November from 6.1 percent in October, measured on a 12-month moving average basis.

The Central Bank has forecast year-end inflation to settle between 6.0 percent to 7.0 percent, with economic growth pitched between 5.0 percent and 5.5 percent this year.

-LBO Newsdesk: LBOEmail@vanguardlanka.com