Sri Lanka forex reserves ease to US$6.67bn in Feb

Sri Dharanee Performance Arts Theatre

May 05, 2013 (LBO) – Sri Lanka’s forex reserves fell 185 million US dollars to 6.659 billion US dollars in February 2013 from a month earlier, and was down 3.1 percent from the beginning of the year, official data showed.

The IMF has said Sri Lanka’s reserves have generally been stable.

“We don’t think there is anything wrong with the reserve position right now,” IMF resident representative Koshy Mathia told reporters last week.

“But certainly there is scope to boost it further.”

Sri Lanka’s annual debt repayments have now reached a level of 1.9 billion US dollars a year and some are commercial debt with large bullet repayments, which reserves could be used in case there is any difficulty in rolling them over.

In 2013 Sri Lanka’s Central Bank has generally bought dollars in forex markets, but it has also allowed high levels excess rupee liquidity to remain in the banking system which eventually depletes the dollars when they are loaned out of banks for spending.

To permanently ‘lock up’ in forex reserves any dollars bought by the Central Bank it has to sell down its Treasury bill stock and kill the rupee liquidity created through their purchase (which are loanable reserves in the domestic banking system), preventing them being spent.

At 6.67 billion US dollars Sri Lanka’s forex reserves are far higher than the domestic monetary liabilities represented by the monetary base as long it does not print money to sterilize the effects of foreign exchange sales.

Reserve money as defined in Sri Lanka at the end of February 2013 was 486 billion rupees or about 3.8 billion rupees at an exchange rate of 126 to the US dollars. Excess liquidity was 47 billion rupees or about 370 million US dollars.

In February 2013, Sri Lanka had a trade deficit of 635 million US dollars down 16.3 percent from a year earlier.

A trade deficit is caused when domestic economic agents spend money that came to their hands in outside merchandise trade exports, including remittances, foreign direct investments, tourism or net borrowings adjusted by the net sterilization activities by the Central Bank.

In February 2013 Sri Lanka has earned 490 million US dollars as remittances (exports of labour), 102.6 million US dollars from tourism (exports of hospitality services), the Central Bank said.

Net inflows to Treasuries markets (exports of debt) was 212 million US dollars in February 2012 and the government had got another 132 as long term loans. About 8.7 million US dollars had flowed into equities.

Update II Foreign reserves have moved down for two months in a row from 6,877 million US dollars in December 2012, according data released by the Central Bank.

But official forex reserves can fall or gain from month to month due to marked-to-market valuation differences in various foreign reserves assets or gold, and also due to payments made by the authorities to settle debts including to the International Monetary Fund.

Gross official reserves in Sri Lanka include the Central Bank’s monetary reserves which back the note issue as well as any unspent fiscal reserves owned by the Treasury or held to settle foreign loans.

This year the central bank has to repay about 500 million US dollars to the IMF. The Central Bank is also committed to settle maturing state debt due to its role as banker to the government.

Foreign reserves were equal to about 4.3 months of imports, the Central Bank said. In February imports were about 1.4 billion US dollars.