Sri Lanka central bank makes Rs22bn forex loss

Apr 16, 2009 (LBO) – Sri Lanka’s central bank, which has a monopoly on money issue in the island, has made a 5.04 billion rupee loss in 2008, badly hit by a 22.8 billion rupee forex loss, despite running a dollar peg which has to be backed by US assets.

The process reversed thereafter, as the monetary authority engaged in an ill-fated peg defence exercise, which eventually put it at doors of the International Monetary Fund.

From August to December 2008 the central bank’s net reserves fell from 3.0 billion US dollars to 1.4 billion dollars.

Foreign Earnings

In monetary authorities that have pegged exchange rates, the yield from investing foreign reserves outside the economy, form a large share of profits.

Sri Lanka’s central bank reported 19.9 billion rupees as earnings from foreign reserves in 2008, (19.8 billion rupees in 2007) including interest and capital gains, as global market interest rates fell.

A pegged central bank would normally invest the majority of its foreign reserves in government securities of the anchor currency country, which is used as the intervention currency in the domestic forex market.

Sri Lanka’s intervention currency is the US dollar.

But in 2008, Sri Lanka’s central bank has