Sri Lanka spends US$125mn defending rupee in December

Sri Lankan Police forming a human chain in parliament to protect the Speaker and enable a vote.

Jan 19, 2009 (LBO) – Sri Lanka has spent 125 million US dollars defending the rupee in foreign exchange markets in December in a month that saw the rupee weaken at a faster rate, the latest data shows.

The monetary base of the country (reserve money) was at 259 billion last week from 253 billion rupees at the end of November indicating an increase of around 50 million US dollars over the same period.

The increase in the central bank Treasury bill holdings, less the increase in the monetary base indicates an approximate level of sterilization of foreign reserve losses and appropriations.

At the 2,029 million dollars level at end-November, the Central Bank said foreign reserves were enough to cover 1.7 months of imports.

Updated The highest amount of 587.7 million US dollars was spent in October when the rupee was tightly pegged to the US dollar at just under 108 rupees, according to Central Bank data.

In December the peg was loosened and the rupee moved steadily from 110 to over 113 to the US dollar. The central bank spent 160.20 million US dollars in the month and also bought 34.50 million from the market.

Since peg defence began by selling dollars and injecting liquidity to sterilize cash shortages (sterilized intervention), a total of 1,182 million dollars had been spent.

But the total reserve losses during the period had been much greater, as it also includes reserve appropriations to cover state debt repayments.

In the past week however a new dollar peg had started to develop around 113.87 rupees to the US dollar, and reserve losses have again started to pick up, dealers said.

Excessive sterilized intervention of a dollar peg usually snowballs into a severe currency crisis, a process which some monetary economists call ‘amplification.’

According to official data end-November foreign reserves were 2,029 million dollars.

Since the end of November to January 16 the central bank’s holding of Treasury bills had increased from 92.8 billion rupees to 151.0 billion rupees or 510 million dollars at an average exchange rate of 113.80 rupees.