COLOMBO: Sri Lanka’s forex reserves dropped 514 million US dollars to 5,119 million US dollars in March from a month earlier, central bank data showed. Sri Lanka’s forex reserves usually drop when the central bank prints to finance the government and defends the exchange rate when the newly minted cash drives up credit and ends up in the forex markets as imports.
Sri Lanka usually ends up printing money to sterilize interventions and maintain a policy rate incompatible with credit demand and inflation or exchange rate target. Sri Lanka’s forex reserves can drop when government loans are repaid with forex reserves, reserve assets falls on revaluation and repayments are made to the International Monetary Fund, for loan taken in 2009. However it March it is not clear whether there were any IMF repayments.
Sri Lanka missed an IMF reserve collection target for December and a repaid tens of billions of rupees of a maturing bond with printed money in a self-destructive move, in a bout of fiscal dominance of monetary policy. The central bank scrambled to undo the damage over the next five weeks. Analysts have warned that the IMF program is lacks domestic asset ceiling which would have prevented the central bank from printing money and also protected it from fiscal dominance.
