Feb 11, 2013 (LBO) – Sri Lanka’s official forex reserves rose by 387 million US dollars to 6,877 million US dollar by end December 2012 from 6,490 million US dollar a month earlier, the Central Bank said. Foreign reserves were up 15 percent from the December 2011 level of 5,957 US dollars.
In order to build up foreign reserves Sri Lanka’s central bank has to ‘save’ money by killing credit to prevent the proceeds of dollar inflows being spent by domestic economic agents, typically by sterilizing forex reserves.
In addition, interest earnings from foreign reserves themselves, net capital gains from foreign reserve assets including gold can boost the dollar value of reserves without domestic agents being involves.
Sri Lanka’s official foreign reserves also include unspent fiscal reserves held temporarily as foreign exchange, in addition to monetary reserves of the Central Bank.
From mid 2011 to the first quarter of 2012 Sri Lanka lost almost two billion dollars as the Central Bank sterilized foreign exchange sales with central bank credit (printed money) driving imports and consumption to unsustainable levels.
From February 2012 monetary policy was tightened and sterilized foreign exchange sales phased out. In the second half of 2013 forex purchases were sterilized (killing domestic credit) allowing foreign reserves to build up.
The Central Bank said reserves were equal to 4.3 months of imports.
In the year to December exports fell 7.4 percent to 9.7 billion US dollars and imports fell 5.8 percent to 19.08 billion US dollars, as trade contracted and the Central Bank sterilized forex purchases to build up reserves.
The trade deficit fell 4.1 percent to 9.3 billion dollars. The trade deficit is caused by the spending power that comes from dollar inflows outside merchandise exports.
These include remittances (exports of labour), foreign direct investments (exports of investments), government and private borrowings abroad (exports of debt) and tourist receipts (virtual exports of leisure services).