Sri Lanka buys US218mn from forex markets in June: CB Governor

June 18, 2009 (LBO) – Sri Lanka’s central bank has bought 218 million US dollars from forex markets so far in June on top of 160 million US dollars bought during the last two months, Central Bank Governor Nivard Cabraal said. Since a float of the rupee in March ahead of an International Monetary Fund (IMF) bailout, the Central Bank has bought 378 million US dollars.

The IMF loan has been delayed amid foot dragging by the United States but following the float of the currency, Sri Lanka’s balance of payments crisis has effectively ended.

The central bank has kept the rupee at 114.90/95 against the US dollar and is buying dollars to prevent it appreciating.

The monetary authority has also relaxed overnight trading limits of banks from this week, which were slashed at the height of the balance of payments crisis last year.

Though a policy decision to relax overnight dollars positions were made Wednesday not all banks were informed of their expanded limits.

“They will all be informed,” Cabraal said.

on Wednesday alone the monetary authority had bought more than 20 million US dollars from the market, he said.

The pressure on a currency comes from liquidity injections made to ‘sterilize’ cash shortages coming from dollars sales, which is expansionary.

The monetary authority is now starting contractionary sterilizations to mop up rupees and lock up reserves.

This week the central bank announced three auctions of Treasury bills in its holdings expiring in 14, 21, 28 days of two billion rupees each.

On Thursday excess reserves in the banking system topped 19.0 billion rupees.

The sale of T-bills held by the central bank sucks out liquidity (excess rupee reserves in the banking system) generated through forex purchases by the monetary authority.

When the money is drained it is not lent into the broader economy and reducing economic activity and imports, allowing the dollars that originally generated the rupees to be ‘locked up’ as foreign reserves.

Even under an IMF program, foreign reserves floors and domestic asset (Treasury bills holding) ceilings are set.

In the past, Sri Lanka has outperformed IMF quantity benchmarks.