Dec 29, 2012 (LBO) – Sri Lanka’s official reserves fell 56.9 million US dollars to 6,490 million US dollars in November 2012 from a month earlier, but is still up 968 million US dollars from a February low of 5.52 billion US dollars. Sri Lanka floated the currency in February 2012 ending contradictory monetary and exchange rate policies leading to the rupee falling from around 110 to 118 to the US dollar.
Sri Lanka steadily lost reserves from mid 2011 as the Central Bank sterilized foreign exchange sales involving defending a currency peg with dollar sales and printing money to prevent a slowdown in credit and a rise in interest rates.
Reserve losses halted in February following the float, but the currency fell sharply to around 134 to the US dollar as the monetary authority continued to sterilize reserves supplied to mostly to commercial banks to settle oil bills without defending other market deals.
In 2012 foreign reserves peaked at 7.05 billion US dollars in September helped by the proceeds of a billion US dollar bond.
In October, official reserves fell to 6.54 billion US dollars as expected with the settlement of Sri Lanka’s maiden 500 million US dollar sovereign bond. Sri Lanka’s official reserves include both monetary and fiscal reserves.
Small changes in reserves can be accounted for by valuation changes or movements in fiscal reserves.
The Central Bank said worker remittances rose 17.1 percent to 5.4 billion US dollars in the 11 months to November 2012 and foreign direct investments fell 9.4 percent to 614.7 million US dollars.
Portfolio inflows reversed dramatically to 280 million US dollars from a reversal of 157 million US dollars as stocks fell to valuation more comparable with the rest of Asia following after being driven to high levels during the credit bubble up to 2011.
The government had borrowed 4.8 billion US dollars, from abroad including 2.0 billion US dollars from rupee denominated Treasuries.
Sri Lanka has a capital controls and inflows through the capital account usually leave the country through the trade account as imports, generating a wide trade deficit.
Sri Lanka has reported trade deficit of 8.5 billion US dollars up to November 2011 with exports of 8.9 billion US dollars, down 6.6 percent from a year earlier and imports of 17.5 billion US dollars, down 4.5 percent from a year earlier.
Under Sri Lanka’s de facto pegged exchange rate regime foreign reserves grow permanently to the extent that the Central Bank can sterilize foreign exchange purchases by selling down its Treasury bill stock and the nominal expansion of the monetary base.