May 10, 2010 (LBO) – Sri Lanka’s foreign reserves fell to 5,032 million US dollars in February 2010 from 5,135 million US dollars in January, which was equal to about 5.5 months of past imports, the Central Bank said. Reserves with balances at the Asian Clearing Union (ACU), a regional arrangement of non-convertible currencies, were 5,408 million US dollars, up from 5,328 million US dollars in January.
Sri Lanka’s foreign reserves are about 180 percent of the country’s monetary base which was around 312 billion rupees (2,730 million US dollars) in February.
Amid a pick up in economic activity, bank credit and imports are rising. In January the central bank said reserves were equal to about 5.5 months of imports.
In January and February, Sri Lankans working abroad had remitted 564 million US dollars, up 13.0 percent from a year earlier.
Sri Lanka trade deficit is driven mostly by capital inflows brought largely to finance a deficit government budget as well as foreign remittances.
Analysts have said that from late 2009 the Central Bank has engaged in a process of quantity easing, reversing a trend of contractionary sterilization that was locking up reserves.
However after the liquidity flooded the market the central bank has scrambled to mop it up.
Previously released data showed that central bank credit to government rose to 132 billion rupees in February from 100 billion rupees in January.
Sri Lanka has a pegged exchange rate and any liquidity created by the central bank can push up inflation, reduce foreign reserves or pressure the exchange rate.