Sri Lanka forex reserves drop in October

Dec 07, 2012 (LBO) – Sri Lanka’s official foreign reserves dropped 7.1 percent to 6,547 million US dollars in October 2012 from a month earlier following the repayment of a sovereign bond, official data showed. The Central Bank said tourism receipts were 790.2 million US dollars in the first 10 months, worker remittances rose 17.6 percent from a year earlier to 4.9 billion dollars, inflows to the stock market were 268 million US dollars and to rupee Treasuries 846 million US dollars.

Inflows of foreign exchange increase the spending power of the domestic economy, triggering imports above exports proceeds, causing a trade deficit, unless the converted rupee proceeds are mopped up by outright sales of Central Bank held securities. Sri Lanka’s foreign reserves rose temporarily 7,053 million US dollars in September as the authorities kept back 500 million US dollars from a billion dollar sovereign bond to settle the island’s maiden sovereign bond sold five years earlier.

Sri Lanka’s reported official reserves are made up of monetary reserves of the Central Bank and fiscal reserves of the Treasury.

Foreign reserves are up 9.8 percent from December 2011.

Reserves were equal to four months of imports, the Central Banks said. Imports have been shrinking this year amid an overall trade contraction.

Sri Lanka’s foreign reserves fell steadily from mid 2011 after the monetary authority began to print money to sterilize foreign exchange sales, injecting unsustainable demand and central bank credit driven import pressure in to the economy.

Sri Lanka has a failed Bretton Woods style soft dollar peg arrangement built in 1951 which is prone balance of payments trouble, high inflation and currency depreciation.

Monetary reserves are more than enough to cover the domestic reserve money (monetary base) of 474 billion rupees (3.6 billion US dollars) at the current exchange rate of around 129 to the US dollar.