Sri Lanka foreign reserves lower at US$5.0bn in December

Feb 16, 2010 (LBO) – Sri Lanka foreign reserves eased to 5,067 million US dollars in December 2009, from 5,228 million US dollar in November which was equal to about 6.2 months of imports, the Central Bank said. From October the central bank started injecting domestic liquidity which halted the foreign reserves collection process.

After peaking at 5.2 billion US dollars, reserves then started to fall.

In December it is usual for some reserves to be appropriated to repay government foreign loans, leading to a slight dip.

Reserves with balances of the Asian Clearing Union, a regional arrangement with non-convertible currencies rose to 5,357 million US dollars from 5,308 million US dollars in November.

Sri Lanka’s trade deficit slumped 52.5 percent to 2,798.6 million US dollars in 2009 amid an economic slowdown following a balance of payments crisis.

Sri Lanka has a soft pegged exchange rate regime and its trade deficit is driven by worker remittances, net capital inflows and any expansionary sterilization activities (money printing) by the Central Bank which expand the spending power of local economic agents.

Worker remittances from expatriate Sri Lankans rose 14.1 percent to 3,330.3 million US dollars in 2009.

Up to September capital and financial account net balance fell to 1.506 billion US dollars from 2.315 billion US dollar a year earlier.

The central bank engaging in contractionary sterilization, also withdrew the equivalent of more than two billion US dollars in rupee liquidity generated from external inflows and built up foreign reserves up to September.