July 13, 2009 (LBO) – Sri Lanka’s gross foreign reserves, without an advance to domestic banks, rose to 1,291 million US dollars in May 2009 from 1,131 million US dollars in April, the latest official data showed. With a 145 million US dollar deposit at a domestic bank, gross monetary and fiscal reserves went up to 1,436 million US dollars in May from 1,296 million US dollars.
The advance to domestic commercial banks, first revealed two months ago, had fallen from 200 million in April.
With a balance at the Asian Clearing Union, a regional grouping including Iran and India that was set up to avoid settling deals in hard currency, the reserve balance was 1,287 million US dollars.
The central bank said gross reserves were equal to 1.46 months of imports, based on the previous average months of imports of 983 million US dollars.
But the concept has little meaning if the central bank is committed to a flexible exchange rate. A central bank committed to a flexible exchange rate can operate without any foreign reserves.
If reserves are used to intervene in trade transactions to preserve the peg without shrinking the domestic monetary base, a pegged exchange rate central bank rapidly gets into a balance of payments crisis.
Usually such a central bank will float the currency when reserves hit rock bottom.
In May the central bank’s net reserves backing its monetary base rose to 1,053 million US dollars from 896 million US dollars in April. In March shortly before the float of the rupee net reserves backing the currency issue fell to 830 million US dollars
These reserve values are equivalent to 1.51 and 1.46 months of imports, respectively.