June 14, 2011 (LBO) – Sri Lanka’s foreign reserves eased to 7,055 million dollars by early June 2011 from 7,163 million dollars at the end of April, amid recent sales of dollars by the Central Bank, official data showed.
Recent sales of dollars have been non-sterilized transactions which have sucked up excess rupee liquidity extinguishing demand.
Balance of payments crises are triggered when interventions are sterilized with fresh liquidity, adding new demand pressure to the economy.
At the moment Sri Lanka has more reserves than its monetary base (reserve money) of around 400 billion rupees.
As long interventions are not sterilized and interest rates are allowed to adjust, a peg can be maintained with just enough foreign reserves to cover the monetary base.
In April and May the central bank sold 257 million US dollars in forex markets. Sri Lanka has a peg with the US dollar.
A central bank statement said foreign reserves were 7,055 million by June 09, but it was above the 6,610 million at the beginning of the year.
The International Monetary Fund has cautioned the Central Bank against selling dollars as it could trigger a balance of payments crisis and result in continuous foreign exchange losses.