Sri Lanka’s gross official reserves grew 431 million dollars to 4,951 million US dollars in March 2024 from 4,520 million dollars in February, data from the central bank shows.
Gross official reserves include both monetary and fiscal reserves of the government, that usually come from loans and grants.
Through gross official reserves are listed as 4.9 billion dollars by March, data shows that by February, the central bank’s net foreign exchange position was a negative 2.2 billion US dollars due to its borrowing.
The central bank bought over 400 million dollars in January and February and also allowed the exchange rate to appreciate amid deflationary policy.
However due to settling official liabilities, reserve numbers did not go up.
The central bank had loans to India, the IMF and it had 3.2 billion dollars in swaps by February 2024, and they are being progressively being settled with reserves collected from deflationary policy or mopping up dollars bought outright from current transactions.
By engaging in swaps with domestic counterparties, the central bank can effectively print money, mis-target rates if the generated rupees are not mopped up, and leave the monetary accounts saddled with a debt in case the money is used for ‘reserves for imports’.
Under a fixed policy rate, using reserves for imports or unwinding of swaps leads to fresh printing of money to mis-target rates, when private credit has picked up, worsening currency crises, analysts say.
However monetary policy so far had been deflationary overall, allowing the balance of payments to be in surplus.
However analysts had warned that under flexible inflation targeting, when rates are cut claiming inflation is low, with the help of inflationary policy (standing lending window or reverse repo operations), when private credit picks up, the balance of payments turns into a deficit and the rupee comes under pressure.
Inflation stops after private credit falls ad monetary stability is restored following rate hikes to end mis-targeting of rates with inflationary policy, and shows up in the price index (which measures 12-month changes) about 12 to 18 months later.
In order to repay debt or collect reserves domestic investments have to be curbed at an appropriate interest rates unrelated to the inflation index.
