Sri Lanka forex reserves rise to US$3,550mn after IMF SDR flow

ECONOMYNEXT – Sri Lanka’s forex reserves grew 744.8 million US dollars to 3,550 million US dollars in August 2021 after a 554.8 special drawing rights (about 800 million dollars) were given by the International Monetary Fund to the country.

Sri Lanka’s central bank has been printing money and has been steadily losing its forex reserves as the newly created liabilities (note issue) was exchange for its foreign reserves (deposits).

A country’s gross official reserves calculated under International Monetary Fund rules, also include balances in the Treasury, outside of the central bank balance sheet.

The central bank in August received the 800 million US dollar equivalent of IMF special drawing rights which and also 150 million dollars via a swap from Bangladesh.

Both SDRs and swaps are a type of borrowings on which interest or a premium has to be paid. Swaps may also involve receiving premiums.

Sri Lanka however has been printing money to both pay state expenses such as salaries and also to keep gilt yields down through a series of price controls or de facto policy rates.

When state workers consume goods or travel using the new money there are not dollars to replenish the food or fuel they consume.

If maturing Treasury bonds are repaid with new notes, bank who hold the bonds will loan the new money to businesses, who will invest and trigger imports in excess of dollar inflows.

If there are no reserves to exchange for the new money, and take it out of circulation the parity (peg) between a foreign note and a domestic note (exchange rate) breaks (depreciates).

If the parity is not allowed to change, there has to be rationing. (Colombo/Aug10/2021)