Sri Lanka foreign reserves US$1.36bn in February; rupee opens weaker

April 21, 2009 (LBO) – Sri Lanka’s gross foreign reserves in February 2009 were 1,369 million US dollars down from 1,415 million US dollars in January, the central bank said as the rupee opened weaker. The rupee opened weaker at 117.60/90 against the US dollar in spot trade Tuesday, dealers said, and was later quoted at 117.50.70. The rupee closed at 117.20/30 levels on Monday.

In February the Central Bank struck a deal with Malaysia to borrow 200 million US dollars. But in that month the monetary authority also spent 250.49 million US dollars defending a dollar peg at 114.25 rupees.

Official reserves are a gross number and it also includes fiscal reserves. They were enough to cover 1.3 months of imports, the Central Bank said.

But import bills were collapsing, indicating that the reserve cover was higher.

The central bank said with balances of the Asian Clearing Union, a regional arrangement which includes Iran and India, reserves were 1,816 million US dollars.

But the Central Bank’s net foreign assets were already down to 1,152 million US dollars by end-January.

The rupee has been allowed to float ahead of an International Monetary Fund (IMF) bailout. The Central Bank has also been cutting rates before properly floating the rupee, which also puts downward pressure on the currency, analysts have said.

The rupee pressure is caused by central bank defence of dollars in the forex markets followed by simultaneous interventions in domestic money markets to sterilize the resulting liquidity loss by printing money.

To break the cycle the currency has to be floated.