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Home Business & Finance Economic Policies

Sri Lanka remittances reach $3bn in first five months, up 18.2-pct todayheadline

June 7, 2025
in Economic Policies
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ECONOMYNEXT – Sri Lanka’s gross foreign reserves dropped 42 million US dollars to 6,284 million US dollars, below the level seen in October 2024, amid rising concerns that another cycle of policy errors is starting.

Sri Lanka’s gross official reserves hit 6,472 million dollars in October 2024, amid warnings of money printing, as large volumes of excess liquidity were dumped into the banking system to mis-target interbank call money rates.

In December and January, the central bank sold dollars on a net basis, as printed money was used for private credit, driving up imports.

In January private credit contracted, and the central bank bought dollars on a net basis.

Policy rate were cut in May 2022, though data shows that interbank rates were ‘signalled’ up, slightly with excess liquidity from dollar purchases boosting interbank liquidity without money being printed, and three month bill yields falling below the bureaucratically controlled rate.

Sri Lanka has had bad consequences from late cycle ‘rate cuts’ in the past.

Analysts have warned that beliefs that rates can be cut or that money can be printed through open market operations are spurious monetary doctrines that emerged in the ‘age of inflation’ and a central bank is just a ‘bank of issue’ subject to laws of nature discovered by classical economists.

Due to the central banks flawed operating frameworks which reject economics (current as well as in the past) people have to suffer exchange and import controls.

Many also leave the country of their birth to stable Middle Eastern countries where macro-economists cannot control short or long term rates and employment is many times their permanent resident population.

By February 2024, gross official reserves were down to 6,086 but private credit eased and the central bank bought dollars. An IMF tranche also came and foreign reserves went up to 6.5 billion US dollars.

After the IMF tranches reserves started to go down again.

Unless money is printed, there will not be immediate forex shortages (the central bank will not have to spend reserves to finance current outflows like imports to stop the rupee from falling from the newly created liquidity) but reserve collections may not be sufficient to repay debt, if interest rates are too low, even if some dollars are bought from the market.

The central bank itself has to settle dollar loans to India borrowed to effectively finance imports when money was printed to artificially boost credit in the run up the default.

As a result, the interest rate structure is dictated by the need to repay debt (by raising deposits from the domestic banking system) and IMF reserve targets and not historical statistical formulae as believed in countries that go to the IMF again and again and default (also again and again once it starts).

The Finance Ministry does not independently buy dollars from the market from rupees raised by Treasury bill sales, and is a helpless prisoner depending on central bank deflationary policy to collect reserves, EN’s economic columnist Bellwether says.

Meanwhile with the central bank running of Treasury bills bought during the crisis (they were converted to step down securities) the ability run deflationary policy is limited to coupon payments coming in, unless action is taken to sell them down.

Failing to reach reserve targets tends to unsettle foreign investors and rating agencies.

Sri Lanka’s central bank is now pursuing a so-called single policy rate involving narrowly controlling a mid-corridor rate, which critics have showed contributed to rapid-fire peacetime currency crises since the end of a 30-year war.

Before open market operations and discretionary monetary policy, external crises were limited money printed in desperation due to war, not due deliberate actions taken to follow follow a statistical doctrine which undermines the working of a credit system. (Colombo/June07/2025)


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Tags: 18.2pct3bnLankamonthsreachremittancesSritodayheadline
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