Dec 24, 2011 (LBO) – Sri Lanka’s forex reserves fell 14.8 percent off a high reached in July to 6,896 million US dollars by October 2011, as the island’s soft-dollar peg continued to be pressured, official data showed. Sri Lanka ‘sterilizes’ interventions to control the interest rate. A monetary regime in which both the exchange rate and interest rate are controlled at the same time, known as a ‘soft-peg’ results in frequent balance of payments crises.
Sri Lanka has had balance of payments crises since shortly after the creation of a soft-pegged central bank in 1950. Before that the island had a fixed exchange rate under a ‘hard peg’ or currency board.
Sri Lanka imports rose 50 percent to 16.3 billion US dollars in the 10 months to October 2011.
Imports are triggered when residents spends proceeds from exports, remittances, foreign direct investments, tourism and net borrowings.
Exports rose 23.4 percent to 8.7 billion US dollars. Sri Lanka’s trade deficit doubled to 7.73 billion US dollars in the 10 months to October 2011 from a year earlier as
Foreign inflows, such as remittances, foreign direct investments or net state borrowings, over and above exports causes a ‘tr