Sri Lanka foreign reserves steady at US$5.2bn by Dec 18

Dec 23, 2009 (LBO) – Sri Lanka’s foreign reserves were steady at 5.2 billion US dollars by December 18, boosted by foreign inflows into debt markets and International Monetary Fund loans, the Central Bank said.

But lately the Central Bank’s bill stock has started climbing and foreign reserve increases are also now tapering off.

In December the government also settles foreign loans, for which foreign reserves are usually effectively appropriated.

By end-November gross official reserves, which includes fiscal balances, were 5,228 million US dollars, up from 4,822 million US by end-October.

Reserves with balances at the Asian Clearing Union, a regional settlement arrangement, were 5,308 million US dollars by end-November.

The Central Bank said 262 million US dollars had flowed into short-term Treasury bills and 1,068 million US dollars into Treasury bonds.

Remittances from expatriate workers had increased to 2,774 million US dollars to November, up 12.9 percent from a year earlier.

The remittances were 557 million US dollars above the trade deficit. Remittances which increases the spending power of economic agents is a key driver Sri Lanka’s trade deficit under Sri Lanka’s pegged exchange rate regime, with capital controls.

But heavy contractionary sterilization of rupees generated from inflowing remittances will tend to deny its use in the economy and lock up the corresponding foreign currency as reserves.

The central bank has been sterilizing inflows by selling down its Treasury bill stock. This reverses the cycle seen during a balance of payments crisis, when money is printed and reserves are lost.