Nov 09, 2009 (LBO) – Sri Lanka needs stable foreign reserves collected from current account transactions as ‘borrowed reserves’ flowing into Treasuries markets can flow out quickly, an International Monetary Fund official said. “Money has rolled right in and reserves are at a comfortable position,” IMF resident representative Koshi Mathai said.
“There is a difference between borrowed reserves and reserves collected from the current account (of the balance of payments), like booming exports.”
Current account transactions like trade are more related to the actual workings and strengths of the economic agents rather than capital flows which are driven by the deficit spending needs of the government and sovereign creditworthiness.
Mathai said there had been stronger inflows from remittances from Sri Lanka’s expatriate workforce but they also tended to generate imports later.
“We have seen that remittances tend to result in imports with a lag,” he said.
Sri Lanka has a pegged exchange regime with exchange controls and any remittance and net capital inflows results in an automatic trade deficit unless the Central Bank withdraws rupee liquidity and locks up the foreign reserves that generated the rupees.