Aug 31, 2013 (LBO) – Sri Lanka was not much worried over currency troubles sweeping South Asia, Treasury Secretary P B Jayasundera said as the Indian Ocean Island followed India into import tightening. In 1991 the Reserve Bank of India completely ran out of foreign reserves and even shipped its gold reserves abroad before halting sterilized interventions in the forex and money markets.
Analysts say sustained forex sales can rapidly depreciate currencies, destroy confidence of investors, push up even longer term interest rates to very high levels to rebalance the policy error, which then leads to banking sector troubles.
In 1997 East Asian nations that sterilized forex sales got into serious trouble despite running budget surpluses and also current accounts surpluses in the balance of payments before interventions began.
Only Hong Kong, which had a currency board, escaped depreciation though overnight interest rates briefly hit 200 percent as speculators tried to hit currency without enough knowledge about the workings of the currency regime and failed.
Update II “We do not worry too much about this situation,” Jayasundera said at a post-session news briefing following a meeti