ECONOMYNEXT – Sri Lanka’s forex reserves were down to 1,716 million US dollars in August 2022 from 1,817 million US dollars a month earlier, Central Bank data showed.
Sri Lanka’s gross forex reserves have tended to fluctuate between 1.9 to 1.8 billion since March 2022 after running out of previously collected reserves.
Most of the remaining gross reserves are from a swapline from People’s Bank of China, which cannot be used to finance imports and encourage the public to live beyond their means.
The central bank is still intervening in the market with borrowed reserves from deferred payments to India under the Asian Clearing Union. The central bank is also getting dollars from a forced sale requirement.
Both actions prevent a free float, analysts have said.
However interest rates have been raised to reduce domestic credit and bring outflows mostly in line with inflows, outside of the India money.
Inflows and outflows balance and a country is free from forex shortages if there is a free float or a hard peg where reserves cannot be used for imports and encourage a country to live beyond its means.
A currency crisis takes place and pegs break because intermediate regime central bank inject money after intervening to maintain suppress interest rates out of line with the outflows, which fires new credit.
Sri Lanka defaulted on external payments in April 2022 which has also halted some projects. (Colombo/Sept08/2022)