May 17, 2019 (LBO) – Sri Lanka’s Central Bank said it is committed to rebuild reserves and allow the exchange rate to function as the first line of defense to external shocks.
As per the memorandum of economic and financial policies contained in the Letter of Intent to the IMF, the Central Bank has recognized the urgent need to step up efforts to enhance reserve coverage through FX purchases and limit FX sales to dampening excessive volatility.
The Central Bank said it is on track to meet the revised net international reserves (NIR) target for end-June, with 100.5 million dollars already purchased in 2019Q1, on the back of a resumption of capital inflows and is committed to build NIR at a faster pace should market conditions improve more than expected.
At end-December 2018, the net international reserves evaluated at market exchange rates stood at 5,494.6 million US dollars.
“We will resume FX purchases to rebuild net international reserves (NIR) to US$6.9 billion by end-December 2019,” the Central Bank said.
“We will also limit FX sales to stemming excessive volatility in the event of disorderly market conditions.”
Gross international reserves (GIR) declined to 6.9 billion dollars by end-2018, as the Central Bank sold 1.1 billion dollars, on a net basis, in 2018 to stem balance of payment pressures.
Gross reserves recovered to 7.6 billion as of end-March 2019, as they resumed FX purchases and the government tapped international bond markets in March, raising 2.4 billion at 5 and 10 year maturities.
The Central Bank said it will consult with the IMF staff monthly on FX market developments and reserves building, or on a higher frequency in case of significant deviations from the envisaged reserves path and the proposed policy response.
The bank also plans to strengthen communications to help clarify the interaction between the intervention strategy and reserve accumulation plans to provide the market with a better understanding of the CBSL transactions in the FX market.
“We have gradually wound down FX swaps with domestic commercial banks, from $1.4 billion at end-February 2018 to $0.88 billion at end-March 2019,” the Central Bank said.
“We plan to further reduce swap liabilities gradually.”
The framework to wind down outstanding liabilities in foreign exchange swaps with domestic commercial banks will include discontinuing the provision of FX swaps on concessional terms and gradually reducing outstanding net short positions of FX swaps with commercial banks.
The Central Bank’s outstanding liabilities or net short positions in foreign exchange swaps with domestic commercial banks which stood at 1,495.2 million dollars at end-December 2017 reduced to 723.2 million at end-December 2018.