Sri Lanka’s official reserves ended up at US $ 7,526 million on January 31, 2020, a tad weaker from US $ 7,642 million on December 31, 2019, indicating the uphill task of strengthening the foreign currency buffers amid the potential expansion in the current account balance and foreign debt repayments.
The International Monetary Fund (IMF) staff mission, which was in the country last week, stated that Sri Lanka missed its December foreign reserves target by US $ 100 million.
The staff mission renewed calls for a flexible exchange rate to rebuild the reserve buffers as a safeguard against the possible shocks.
“Renewed efforts are needed to rebuild reserve buffers to safeguard resilience to shocks, under a flexible exchange rate,” Mission Chief Manuela Goretti said.
However, the Central Bank maintains that it does not excessively engage in the foreign exchange market, unless to iron out excessive volatility, which is part of its mandate.
Economic analysts warn that if the full impact of the low rates permeates through the real economy, that could stoke renewed demand for consumption and intermediate goods, which mostly are imported.
This could expand the current account balance and thereby the balance of payment, which will not bode well for the reserves.
What could exacerbate the situation is the impending foreign debt repayments, which will most likely have to be rolled over.
Sri Lanka has US $ 4.0 billion debt repayment scheduled for every year from 2020 to 2022.