Sri Lanka forex interventions to ease, inflows expected: CB Governor

Sept 16, 2011 (LBO) – Sri Lanka’s recent interventions in forex markets which were partly triggered by payments for oil will ease in the future, helped by higher expected inflows, Central Bank Governor Nivard Cabraal said.

“Now the interventions are much less,” Cabraal said. “Even going forward, our estimates are that it will be limited.”

Sri Lanka’s central bank sold 416 million dollars in July and liquidity continued to dry up during August and September indicating further reserve outflows.

Analysts have said that Sri Lanka’s rapid credit growth was draining bank reserves and higher interest rates or a depreciation of the currency was needed to restore economic equilibrium.

Cabraal says stronger inflows are expected in the near term. In addition credit is also expected to slow, with a downturn also expected in developed nations.

He said foreign direct investments are in the pipeline and banks are also expected to raise Tier II capital abroad.

“There are government flows which are also strong,” he said. “Remittances will also strengthen towards December.”

The central bank has intervened to keep a dollar peg at around 110 rupees. Cabraal said a recent spike in interventions were partly due to petroleum related payments.

“There was strong import demand, mainly oil bills that took the bulk of exchange requirements,” he said.

“It would not have been possible to meet them other than by supplying dollars from the Central Bank.”

He said foreign reserves were at a record around eight billion dollars.