Sri Lanka aims at forex reserves of 4.5 months of imports: CB Governor

L-R: Kishan Nadarajah – Principal, BOV Capital, Chalinda Abeykoon – CEO, Lanka Angel Network, & Aloka Gunasekara – Program Manager, StartupX Foundry

Apr 10, 2012 (LBO) – Sri Lanka would aim to maintain foreign reserves equal to 4.5 months of imports with balance of payments surplus of 1.2 billion US dollars projected for 2012, Central Bank Governor Nivard Cabraal said. “A level of 4.5 months (of imports) is comfortable,” Cabraal told reporters. “If it goes down a little it is also fine.

“It is not a sacrosanct number. Give or take a little bit from either side.”

In 2012 the Central Bank is projecting a balance of payments surplus of 1,250 million US dollars.

A ‘balance of payments surplus’ a term dating back to old gold standard days when gold reserves built up inside a country until demand and inflation rose and the flows reversed.

A central bank with a currency peg however invests all its reserves abroad mostly in government securities of a foreign country to which the currency is pegged and nothing remains within the country.

To collect and keep reserves the Central Bank has to mop up or extinguish the rupee proceeds of that amount of inflows and kill demand and imports permanently.

A central bank achieves this objective by selling down Treasury bills in its portfolio, either to banks or to citizens, which were previously acquired