Sri Lanka hopes narrow current account gap, despite strong capital flows

May 14, 2012 (LBO) – Sri Lanka’s central bank is expecting to increase foreign reserves in 2012 and narrow the current accounts deficit in the balance of payments, despite strong capital inflows, which will increase domestic spending power. BOP Surplus

The bank is projecting a 1.25 billion US dollar ‘balance of payments’ surplus for 2012. A so-called ‘balance of payments surplus’ roughly correspondents to an increase in the central bank’s foreign reserve account.

In order to ‘capture’ such a saving a central bank has to deny other market participants the use of the money coming from inflows, by selling down its Treasury bill portfolio and mop up rupee reserves in the banking system, effectively inducing savings.

The country’s interest rates have to be at a rate enough to sell down the T-bill portfolio. During the past two months, the Treasury bill stock has largely stayed stable at a little below 220 billion rupees, after spiking in April due to debt monetizing.

By May 02, foreign reserves were at 5.9 billion US dollars, the Central Bank said. The level had been broadly stable for around two months.

Last year the Central Bank bought Treasury bills and injected rupee reserves in to the system, resisting an in