Sri Lanka central bank revises foreign assets

May 18, 2009 (LBO) – Sri Lanka’s has adopted a different reporting format for foreign reserves, giving a breakdown of cash advanced to domestic banks, Central Bank governor Nivard Cabraal said.

But the government officially declared fighting at an end Monday with state media saying the top leadership of Tamil Tiger separatists has been killed.

The Central Bank has lost more than two billion dollars in an ill-fated bid to preserve a dollar from September last year plunging the country into a balance of payments crisis. Gross reserves peaked at 3,424 million US dollars in August.

However the rupee was ‘floated’ in late March ending a peg-defence cycle of simultaneous interventions in foreign exchange and domestic money markets, which is expansionary, helping balance aggregate demand and take pressure off the rupee.

A ‘float’ is a prior action for an IMF loan and is the key tool of fixing the balance of payments crisis.

The IMF loan itself is a transaction external to the domestic monetary system, though it can instill confidence and head off external insolvency.

Now the central bank is defending a floor to prevent the rupee appreciating. The rupee climbed to 114.90/115.10 against the greenback Monday after opening at 117.40/60 levels.

“Today also we bought dollars,” Cabraal said. “If not the rupee would have appreciated more.”

The central bank was also a net buyer in forex markets in April, helping build up reserves.

The central bank said the end-March reserves were enough to cover 1.2 months of imports. But imports have been collapsing. The trade deficit shrank 54 percent to 644 million US dollars in the first quarter. Imports fell 30 percent.

When balances of the Asian Clearing Union (ACU), a regional payments mechanism were included, the reserves covered 1.3 months of imports. Gross official reserves were 1,373 million US dollars, the Central Bank said. The ACU includes Iran and India. The central bank said gross official reserves, which include fiscal reserves, were 1,272 million US dollars in March 2009, down from 1,368.7 million US dollars in February.

In a departure from its usual practice, the central bank revealed that the gross number included 200 million US dollars given to two domestic banks “to facilitate payments of petroleum bills” in an effort to reduce pressure on the forex market.

“Like we place a deposit at Citibank, or Bundesbank, we can also place a deposit at a domestic bank,” Governor Cabraal said.

“Now we are giving a separate breakdown for that number.”

The change reduced the central bank’s own net foreign reserves in February – which is part of the country’s money supply – to 946.5 million US dollars from the previously reported figure of 1,117 million, according to published data.

The March-end net foreign assets were down to 830.2 million US dollars based on an end-month exchange rate of 115.14 rupees to the US dollar.

The revision comes ahead of an International Monetary Fund bailout, which has become mired in an international diplomatic tangle over fighting in the north and the east.