Sri Lanka’s gross forex reserves fell marginally to 5,421 million US dollars in May 2024, from 5,471 million US dollars, though the central bank was a net buyer of foreign exchange in the market in the month.
The central bank bought 224.5 million US dollars and sold 32 million through an ad hoc pegging mechanism (it is not possible to build reserves in a floating exchange rate regime) from commercial banks in the month.
Sri Lanka’s gross official reserves are made up of the central bank’s monetary reserves (bought outright against reserve money or borrowed through buy-sell swaps and the IMF), and balances at the Treasury (also borrowed unless the are privatization proceeds).
The central bank’s net reserves are negative, but has been improving with the collection of monetary reserves.
Though gross reserves fall, there is no data yet available to show whether net reserves improved in Ma due to settlement of dollar liabilities of the central bank or that of the government.
The central bank has to repay old IMF loans taken during currency crises coming from inflationist rate cuts before 2019 and Indian Reserve Bank borrowings via deferred Asian Clearing Union dues, which delayed the return to monetary stability in 2022.
The borrowings have since been converted to a swap, which is being settled.
Central bank swaps were invented by the Federal Reserve in the early 1960s on an ad hoc basis as a tool to continue to print money and delay rate corrections, and later formalized in to standing arrangements despite misgivings of European central bank chiefs.
The Fed swaps, which delayed interest rate corrections by the Fed (by halting the redemption of gold by prudent European central banks of excess Fed notes and effectively giving them exchange cover) contributed the eventual collapse of the Bretton Woods, critics say.
How the knowledge was lost in later decades leading to high levels or monetary instability and external default (in Argentina and Sri Lanka among others) is not clear, but Saltwaterism may have played a part.
