Sri Lanka forex reserves down to US$1.6bn in November | Sinhala News

ECONONOMYNEXT – Sri Lanka’s official reserves have dropped to 1,587 million US dollars in November 2021 from 2,269.2 million US dollars in October, official data showed amid low interest rates and sterilized interventions.

Forex reserves are now about one month of imports.

Sri Lanka also has a 1.5 billion US dollar undrawn swap with the People’s Bank of China.

Sri Lanka’s forex reserves are now the lowest since May 2009, when reserves hit 1,435 million US dollars.

Sri Lanka reserves hit 1,272 million US dollars in April 2009, when the rupee was floated.

A float, completely suspends convertibility through a non-credible peg, stops sterilized interventions (intervening to maintain a non-credible peg and injecting liquidity to maintain policy rates, which triggers further credit and imports), and gets the spot market to work.

Analysts however have said Sri Lanka’s current policy rate of 6.0 percent is too low for a safe float and has to be hiked before a float.

A floating exchange rate does not need forex reserves to “manage” the exchange rate unlike a reserve collecting peg. However interest rates have to be sufficiently high to limit or contract liquidity injections through open market operations.

Following a successful float, the currency can be re-pegged provided domestic private credit is curtailed and bond auctions are successful.

Sterilized forex sales are part of a so-called ‘Latin America clause’ found in central banks set up after the Great Depression and the Keynesian dogma to try to operate counter-cyclical policy (sterilize the balance of payments) despite running a peg.

It eventually led to the collapse of the gold standard and subsequently the Bretton Woods system as well.

For more information money regimes, the difference between floats and pegged regime: Why Sri Lanka’s rupee is depreciating creating currency crises: Bellwether

(Colombo/Dec07/2021)

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