ECONOMYNEXT – Sri Lanka’s official forex reserves dropped 613 million US dollars to 7.309 million dollars in March 2018 from a month earlier, official data showed.
Sri Lanka’s official forex reserves are made up of both central bank’s own reserves collected by mopping up excess liquidity and finance ministry reserves held as dollars.
In March the central bank bought 98.50 million dollars from commercial banks to maintain its ever-depreciating inflationary de facto peg with the US dollar, indicating that credit was still slow allowing dollars to be collected.
Sri Lanka’s reserves can fall when government external payments are settled out of Treasury or monetary reserves.
Since late 2017 the central bank had been able to buy dollars as credit slows and keep them by selling down its domestic assets stock.
However if credit picks up, or state borrowing go up its ability to collect reserves will fall. Any sustained liquidity injections, reverse repo auctions or outright purchases of Treasury bills, termination of term repo deals will result in loss of central bank reserves.
In April the central bank cut the ceiling policy rate from 8.75 percent to 8.50 percent, while keeping the floor rate at 7.25 percent and the central bank is planning to narrow the corridor further.
Analysts say a narrower corridor will trigger its domestic operations departments to print money engage in quantity easing, more often. (Colombo/Apr16/2018)