Sri Lanka forex reserves edge up by slightly to US$1,717mn in September

ECONOMYNEXT – Sri Lanka’s foreign reserves edged up 60 million US dollars to 1,717 million dollars in September 2022 from 1,717 million US dollars.

Sri Lanka lost all its foreign reserves after money was printed from 2020 to suppress rates and target an output gap and eventually defaulted on its sovereign debt.

About 1.5 billion US dollars of the reserves are borrowed from China through a swap. Fortunately China had barred the use of the money if reserves had fallen below three months of imports.

Sri Lanka lost the reserves as printed money blew a hole in the balance of payments. A part of the reserves were lost repaying foreign debt after monetary stability was lost, a part was due to financing deficits.

A large part of the reserves were lost after bond auctions were scuttled through price controls and the central bank purchased debt issued for past deficits injecting liquidity, which were in turn redeemed by selling reserves.

A part of the reserves were lost in private sector finance (defending the currency for imports and injecting money into banks to sterilize the intervention and maintain the policy rate) after excess liquidity fell (sterilized interventions).

Both Bangladesh and India is losing reserves to sterilized interventions.

Sri Lanka now no longer has reserves to engage in sterilized interventions and finance unsustainable private sector credit and imports. A country with monetary stability do not need reserves for imports.

However the central bank is buying dollars through a surrender requirement and selling for oil imports, intervening in both directions of the peg which has lost credibility.

With interest rates now corrected to around 30 percent, private credit is negative and imports falling. Sri Lanka is also seeing capital outflows from banks. (Colombo/Oct07/2022)

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