Nov 06, 2010 (LBO) – Growing credit and imports may reduce excess rupee reserves in Sri Lanka’s banking system which built up as the central bank bought foreign exchange to stop the currency appreciating, deputy governor Dharma Dheerasinghe said. “Credit is moving,” he said. “Total credit growth is now about 15 percent.”
In 2009 credit contracted and imports collapsed. Sri Lanka’s higher interest rates then attracted inflows but because banks did not lend the central bank was able to sterilize rupee proceeds of dollars bought and lock up foreign reserves.
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Central bank Governor Nivard Cabraal said last week that reserves were above ‘optimum.’
“Above optimum is correct,” Dheerasinge said. “We have to look at the reserves together with the other fundamentals. We cannot have one above, one below. Those have to be compatible to each other.
“We are looking at a reserve level of five to five and a half months of imports. Now we have a level of 6.5 months of imports.”
Sri Lanka is due announce loosen foreign exchange controls on the capital account in November. If it results in an outflow the excess liquidity and its corresponding foreign reserves can easily absorb an outflow.
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