Sri Lanka sells 400mn dollars in July to keep peg

July 15, 2011 (LBO) – Sri Lanka’s central bank has sold 416.9 million US dollars in July to maintain a peg with the US dollar amid high credit growth that is drawing down excess rupee reserves in banks, official data showed. High credit growth in the banking system is has rapidly exhausted excess rupee reserves in the banking system, taking their accompanying dollar reserves out of the country as the credit created fresh import demand.

Other than in March and June 2011, which are test dates in an International Monetary Fund program, the Central Bank has not been a net buyer in the forex markets.

However July has seen the heaviest dollars sales ever.

In the last week of July Sri Lanka’s government borrowed a billion dollars from a sovereign bond, replenishing

Only a part of the loan was used to settle foreign loans, the balance replenished dollar and foreign reserves.

Excess reserves in banks climbed to 77 billion rupees in July 28 after the proceeds of the sovereign came in and has since gone down to around 60 billion rupees.

June central bank data showed that commercial banks loaned 33 billion rupees to private business and loans to the state from banks also grew suddenly rose 26 billion rupees.

The IMF has warned against peg defence earlier in the year as the practice can push country towards a balance of payments crisis unless the central bank is prepared to allow rates to go up when excess rupee reserves are exhausted.