Sri Lanka and Mongolia forex debt ratios high: Fitch Report

Dec 17, 2012 (LBO) – Foreign currency denominated debt is expected to fall as a ratio of current receipts in except for Sri Lanka and Mongolia, where it will remain high, Fitch Ratings said in a report which tracked 12 emerging Asian nations. If the central bank then sterilizes the forex interventions with fresh money to fill liquidity shortages and maintain the monetary base at the earlier level or to prevent interest rates going up, a full blown ‘balance of payments crisis’ can be generated, even when plenty of forex reserves are available.

Meanwhile Fitch said a negative gap between inflation and the policy rate in Sri Lanka was only second to Mongolia among 12 Asian countries tracked by Fitch Ratings. Four other countries had smaller negative policy rates.

Sri Lanka has two policy rates, the rate at which money is injected into the economy which was cut by 25 basis points to 9.50 percent in December and the rate at which money is drained from the market at 7.50 percent.

When bank credit is strong the upper policy rate tends to be active, when credit is weak the lower rate tends to be active.

Sri Lanka latest rate cut came as