ECONOMYNEXT – Sri Lanka’s gross official foreign exchange reserves fell to 2,267 million US dollars in October 2021, down 73 percent from August 2019 data show, when inflationary policy began with the central bank started buying bonds to target an output gap.
October reserves are down 436.7 million US dollars from the 2,704.2 in September. September reserves have been revised up from the initial 2,581.3 million US dollars reported earlier.
Foreign reserves in October are down about 65 percent from a year earlier, when money printing ratcheted up in so-called Modern Monetary Theory.
However the central bank lost the ability to collect forex reserves from around August 2019, when it started to print money to target an output gap, despite having a reserve collecting soft-peg.
The October reserves are about 1.4 months of average imports up to August. However the central bank also has an undrawn 1.5 billion US dollar swap from the Peoples’ Bank of China which can be used for certain external payments.
Sri Lanka’s imports have soared amid money printing low interest rates, overtaking the pre-pandemic 2019 when the country also had tourism revenues.
Sri Lanka is operating a soft-peg at 203 to the US dollar giving convertibility to most imports and has sterilized interventions at 6.0 percent.
Despite the peg being at its weak side, forcing liquidity injections to sterilize interventions, the central bank has tightened a surrender requirement.
A surrender requirement will create money at 6.0 percent, on a pegged regime that is already on its weak side.
When a peg is weak, a central bank should be selling dollars and withdrawing liquidity to tighten the credit system and push rates up until the reserve depletion stops, not buying dollars to inject liquidity and loosen the system.
After injecting money to short banks, the central bank has been mopping some money at also 6.0 percent.(Colombo/Nov08/2021)