ECONOMYNEXT – Sri Lanka’s gross foreign exchange reserves fell to 24%, US$2,361 million in January 2022 from US$3,137 million in December 2021, amid debt repayments and possible interventions.
Sri Lanka secured a US$400 million swap from India in January and repaid a US$500 million sovereign bond.
Sri Lanka also had to pay local law bonds denominated in dollars after most were not renewed.
In recent months, the central bank has also intervened heavily in the foreign exchange markets by providing reserves for imports.
Market interventions, which are not accompanied by a rate hike, tend to create more demand when sterilized with new money to maintain a fixed interest rate, in a vicious circle self-sustaining when domestic credit is strong.
Although the yuan is a recognized currency in the IMF’s special drawing rights basket, the extent to which Sri Lanka is free to use reserves is unclear. Without the Chinese Yuan, Sri Lanka now has $830 million in reserves. However, China is the country’s leading source of imports.
Sri Lanka’s net foreign exchange reserves were negative, with the central bank’s external liabilities exceeding its assets by $1.6 billion in December.
Analysts have urged the monetary authority to raise rates and float the currency preferably with an International Monetary Fund program in place. (Colombo/February 07, 2021)