May 6, 2012 (LBO) – Sri Lanka’s foreign reserves fell to 5,552 million US dollars at the end of February 2012, down 32 percent from a peak of 8,098 million US dollars in July 2011, official data shows. Sri Lanka’s reserves fell steeply during the second half of 2011 credit taken by state enterprises to manipulate energy prices amid already high loan growth to ordinary citizens put pressure on a dollar peg.
By end February foreign reserves were equal to 3.2 months of imports, the Central Bank said. With a balance at Asian Clearing Union, a regional arrangement involving some non-convertible currencies, reserves were equal to 3.9 months.
The reserves were still above the domestic monetary base, indicating that all rupee liabilities could be met by the Central Bank, unless it printed fresh money.
From August the Central Bank sterilized foreign exchange sales with printed money driving credit and import demand to new highs, creating a steady loss of reserves. In January more money was printed for so-called ‘provisional advances’ to fill budget gaps.
Analysis of the Central Bank’s domestic assets show that foreign reserves bottomed out around the second week of March 2012, about two weeks after foreign exchange interventions were reduced and fuel prices were raised.
The Central Bank said in the first two months Sri Lanka spent 3.45 billion dollars on imports, and earned 1.79 billion US dollars from exporting merchandise, running a ‘trade deficit’ of 1.69 billion US dollars.
However the country also earned 943 million US dollars from exports of labour, 174.5 million US dollars from selling tourism services, and 807.6 million US dollars by exporting government debt, totaling 1.92 billion US dollars.
There are timing differences in settling imports, especially oil.