ECONOMYNEXT – Sri Lanka has ended 2024 with gross official reserves of 6,091 million US dollars down 360 million US dollars from a month earlier, official data show.
Reserves are down for the third month in a row.
Gross official reserves are made up of both monetary and fiscal reserves in the Treasury, which usually come from foreign loans and grants.
Central bank Governor Nandalal Weerasinghe has said year-end reserved dipped due to year end debt repayments.
Sri Lanka’s official reserves are still up by 1.6 billion dollars in 2024.
In order to collect monetary reserves, the central bank has to run deflationary policy at an appropriate interest rate.
Under flexible inflation targeting, promoted by the International Monetary Fund, reserve collecting central banks are encouraged to print money through open market operations based on historical 12-month inflation, disregarding the balance of payments, leading to recurring currency crises.
A single policy rate, which distorts inter banks markets will worsen the problem, analysts have warned.
The single policy rate, called the Monetary Policy Rate is found in several African countries which defaulted and has found it more difficult to control inflation and the exchange rate.
There have been warnings that the central bank has returned to inflationary policy in the last quarter driving up excess liquidity in money markets and encouraging banks to give loans without deposits.
When printed money or excess liqudity is used for private imports, foreign reserves are run down.
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When money injected into banks to keep rates down are re-borrowed by the government through the banking system and used to acquire dollars, official reserves can go down.
Reserves can be used to smooth debt repayments which spike in certain months, but to re-build reserves, deflationary policy has to be operated in the subsequent months at an appropriate interest rate.
Data show that central bank was still able to collect foreign reserves in December on a net basis.
Since the end of a civil war Sri Lanka has run into peace-time external crises, Latin America style, as soon as private credit recovered, due to rate cuts enforced with inflationary open market operations.(Colombo/Jan08/2024)
