Jan 08, 2010 (LBO) – Sri Lanka’s Central Bank has been a net buyer in foreign exchange in December following three months of net sales amid unprecedented excess reserves in the banking system. Sri Lanka’s reserve money (without excess reserves) has started rose to 355 billion rupees on January 06 2011 from 338.5 billion rupees in end September 2010.
In December the central bank bought 70.40 million US dollars from commercial banks and there were no sales.
In December Sri Lanka’s money supply expands as cash draw downs from banks increase during the Christmas and New Year holiday period.
In December export industries usually sell dollar savings to pay festival advances to workers satisfying part of the increase in additional cash reserves of banks.
In previous years the government also used to print money to pay festival advances to state workers by selling Treasury bills to the Central Bank.
But this year Sri Lanka’s banking system has been flooded by more than 120 billion rupees in excess reserves deposited overnight at the Central Bank, which can be easily borrowed by the state without printing new money.
Sri Lanka is sitting on more than 6.7 billion dollars of foreign reserves. From September to November the Central Bank sold 446 million dollars, but the sales were unsterilized absorbing excess liquidity currency-board style posing no danger to the economy.
Excess reserves deposited overnight at the Central Bank are technically not counted as the monetary base but behaves in the same way, giving liquidity to dollar central bank dollar sales.
Amid credit growth, such excess reserves can also fuel inflation.