Sri Lanka spends a billion dollars on interventions

Dec 23, 2008 (LBO) – Sri Lanka has spent 266 million US dollars intervening in foreign exchange markets in November, taking the total over the past three months to over a billion dollars, the latest official data has revealed. But the inter bank market now has domestically generated excess liquidity of around six billion rupees, down from nine billion earlier. In December a seasonal demand for cash causes a drawdown from the system, but excess liquidity remains.

Overnight rates are near 13.0 percent down from close to 19.0 percent.

Analysts say domestically generated liquidity, as well as low overnight rates are fertile conditions for further weakening of the currency.

November interventions of 266.48 million US dollars were much smaller than the 587.7 million spent in October by the central bank to defend a ‘soft’ peg with the US dollar, first at 108.00 and then at 110.00 rupees.

In September 202.68 million dollars was spent on interventions, making up a total of 1056.86 million US dollars, since the intervention crisis began.

In December the central bank stopped intervening and largely allowed forex markets to determine the exchange rate, ending a vicious cycle of currency defence and liquidity injec