Foreign reserves up at US$ 3.5bn by end-August amid fresh inflows

• Up from US$ 2.8bn by end-July as SL receives IMF’s SDR allocation and Bangladesh Bank’s first two swap tranches 

Sri Lanka’s foreign currency reserve assets recouped in August after sinking to post-war low in July as the country took receipts of new foreign inflows to prop up its reserves which came under severe pressure from foreign debt repayments and higher imports.

Official reserve assets reached US$ 3,550.7 million by the end of August from US$ 2,805.9 million in July after the Central Bank received its Special Drawing Rights (SDR) allocation of 554 million equivalent to US$ 787 million from International Monetary Fund (IMF). 

Sri Lanka also received the first two tranches of the US$ 250 million currency swap with the Bangladesh Bank, which came at US$ 50 million and US$ 100 million each.  

However, not everything received from the IMF was converted into US dollars, the Central Bank said. 
“Of the IMF’s allocation of SDR 554.8 million received by Sri Lanka on 23rd August 2021, a large portion was converted into US dollars,” the Central Bank said. 

August reserves also didn’t include the US$ 1.5 billion worth of renminbi currency swap the Central Bank signed with the People’s Bank of China in March this year as the country hasn’t decided to draw down the facility, which the authorities claim as is kept as a buffer. 

The August reserves provide an import cover of 2.13 months, up from 1.8 months in July based on average monthly imports of US$ 1,670.8 million in the first six months, which reflected an increase this year both due to higher fuel bill and increase in most other goods as domestic consumption and other manufacturing activities ramped up.  

The import cover of the reserves increases up to 3.02 months when taken with the renminbi currency swap. 
The increase in imports is also attributed to the continued liquidity injections by the Central Bank in large proportions since the onset of the pandemic to provide support to the virus-hit economy. As part of this money drained out of the country, as people depended on imports for most of their consumption and intermediary goods.

Liquidity injections aimed at maintaining lower domestic interest rates, which boosted private sector credit, also played a part in higher imports.

But without a corresponding increase in exports and other foreign inflows, the reserves got depleted when Sri Lanka tried to defend the rupee peg with the dollar by selling reserves. 

However, when reserves were coming under continuous pressure from constrained inflows due to pandemic resurgence and the foreign debt maturities, the Central Bank asked banks to manage their foreign currency outflows within their inflows.  This caused the current foreign currency shortage in the domestic market, prompting dollar rationing by the banks and also causing grey market for dollar exchange even within the formal banking channels due to the massive supply and demand gap created for foreign exchange.    To bring the situation under control, Sri Lanka last week fixed the dollar/rupee exchange at Rs.200/Rs.203 and slapped a 100 percent cash margin requirement for selected imports to discourage them, which came on top of a slew of other measures taken since last year to control foreign exchange outflows via import bans and limits on personal and corporate flows.