The Government is expecting to boost the island’s foreign exchange reserves which had fallen to USD 1 billion dollars by October to 3.5 billion US dollars by the year end, Central Bank Governor Ajith Nivard Cabraal said.
Sri Lanka has lost forex reserves steadily from around August 2019 as inflation policy involving liquidity injections began despite having a pegged the exchange rate.
Sri Lanka’s gross foreign currency reserves have plummeted 70 percent to 2.3 billion dollars in the first 10 months of the year and efforts are under-way to boost it with swaps and other borrowings.
“It will include several other swaps as well and it will be at least 3.5 billion US dollars,” he said.
The Central Bank in its six-month policy framework announced on October first had estimated an inflow of 10.85 billion US dollars in the three months through December.
That inflows include 1 billion US dollar bilateral loans, 300 million US dollar multilateral loans, 300 million US dollar syndicated loans, 1 billion US dollars from swaps with other central banks, 4.3 billion US dollars from both merchandise and service exports and 1.8 billion US dollars from worker remittance.
Sri Lanka has 1.5 billion US dollar equivalent Remmibi swap with the People’s Bank of China, which is not drawn down.
“The Chinese one if we take it into our books by drawing the cash then it will be included, but otherwise it won’t. Right now we are taking the reserves without the Chinese loans,” he said. Governor Cabraal said the RMB is an international reserve currency which can be counted among reserves. He said Sri Lanka had some RMB assets already.
Sri Lanka’s 81 billion US dollar economy is facing heightened risk of sovereign debt default according to rating agencies which have downgraded the currency to CCC. Cabraal however said money to repay debt in 2022 has been earmarked and there will be no default. Foreign reserves of a pegged monetary regime go down as dollars are given in exchange for the newly printed money (convertibility) to prevent the exchange rate from falling.
Sri Lanka has found it more difficult to maintain monetary stability after call money rate targeting with excess liquidity began about five years ago, analysts have said, forcing the central bank and government to borrow abroad to repay loans or run-down existing reserves.
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