Aug 09, 2013 (LBO) – Sri Lanka probably has ‘mamma’ bear forex reserves an International Monetary Fund official said responding to the official position that the country had ‘goldilocks’ reserves that were just right. The Central Bank also has to repay the IMF about another 250 million US dollars in the second half of 2013, which will go directly out of forex reserves.
The central bank has also started tightening or delaying data releases, which has k2in recent years been a strong signaling event for market participants.
Sri Lanka’s looser monetary policy stance is also not conducive to growing reserves, as reserve build ups involve curbing domestic credit.
While the level of foreign reserves is not relevant for a central bank that is prepared to float the currency or follow open market operations (liquidity injection or withdrawals) that do not contradict forex operations, they are largely involved with perception.
Analysts say developing countries with pegged rates tend to face so-called ‘beauty contest’ pressure to display forex reserves to both investors and domestic players as a sign of strength and stability.