Sri Lanka reports US$ 400 million lower foreign exchange reserves in May

June 16,2006 (LBO) Sri Lanka’s official reserves fell to 3.4 months of imports, as the central bank spent almost 100 million dollars defending the currency in May, the latest data released by the country’s Central Bank showed. In the June monetary policy statement released Friday, Central Bank said gross official reserves stood at 2.6 billion dollars by end May 2006.

“The gross official reserves stood at 2.6 billion dollars, by end May 2006, which is sufficient to cover 3.4 months of imports,” the Central Bank said in its June monetary policy statement.

This was almost 400 million dollars lower than the 3.0 billion dollars official reserves the Central Bank reported earlier, when it released external trade data for the first four months of the year on May 30.

Official reserves were then enough to cover 3.8 months of imports.

But central bank officials denied that 400 million dollars had been lost in defending the currency in May, saying it is partly due to a change in the way reserves are reported from this month.

An analysis of reserve money movements by Lanka Business Online two weeks ago, showed that Sri Lanka should have lost about 80 to 90 million dollars in May.

Official data on foreign exchange market activity later showed that the central bank has spent 95.9 million dollars intervening in the inter-bank foreign exchange market through the month of May.

Up to April reserve numbers had also included Asian Clearing Union (ACU) credits, which had been settled in May.

Officials say in the future, ACU credits would not be included in the reported reserve numbers.

Iran, where Sri Lanka imports most of her crude oil, and Pakistan, where military equipment is imported are both in the Asian Clearing Union.

The defence magazine, Jane’s Defence Weekly reported that Sri Lanka has ordered 60.0 million dollars worth of military equipment and services, with the Sri Lanka Army accounting for 20.0 million dollars and the Air Force 38.1 million dollars.

On Friday Sri Lanka raised policy rates by 25 basis points to reduce the volume of money printed to finance the deficit, and avoid driving up inflation further and worsening a balance of payments problem.

The central bank has been buying large volumes of treasury bills since May, to maintain policy rates, as an increasingly cash hungry government relied on domestic credit to finance subsidies and military expenditure.

The government has also raised the price of fuel and has indicated that prices would be adjusted more frequently, reducing the need for printing money, which will in turn reduce the build-up of macro-economic imbalances and inflation. The government is also planning to borrow more foreign exchange.