Despite numerous attempts by the Central Bank to justify the country’s current gross external reserve position that now stands at US $ 6.9 billion or equivalent to 4.5 months of imports, the International Monetary Fund (IMF) considers this to be relatively low by most criteria and has urged the authorities to strengthen the reserve position.

“International reserves are relatively low by most metrics, and encourage strengthening the reserve position as circumstances permit,” IMF noted concluding Article IV consultation with Sri Lanka.

Although the existing level of reserves cover 4.5 months of imports— above the international benchmark of 3 months—actual reserve level of the country was low throughout the last decade in comparison to 100 percent of short term debt, another widely accepted metric to estimate the adequacy of a country’s reserve (refer figure).

“I think we have got the right balance. Not too much, not too little. We will be looking at it carefully, and moving on we will ensure that Goldilocks is comfortable,” said Central Bank Governor Ajith Nivaard Cabraal at the beginning of this year on the reserve level.

However, international benchmark says an adequate level of reserves should also cover 100 percent of short-term debt and 20 percent of broad money supply (M2) respectively, besides 3 months of import coverage.

Reserve adequacy, as measured by the ratio of gross official reserves to short-term external debt (with remaining maturity of one year or less) slightly improved to 63 percent by the end 2012 from 60.6 percent recorded at end 2011.

The Central Bank too observing this insignificant improvement said, “..the relatively high increase in short-term debt, particularly the increase in investment in treasury bills and treasury bonds, resulted in the reserve adequacy ratio improving only marginally.”

Meanwhile according to the new metrics proposed by IMF in the aftermath of the recent economic financial crisis to assess the reserve adequacy of emerging markets taking into account the drains of foreign exchange during crisis episodes emanating from external shocks, Sri Lanka’s actual reserves have been in excess of the 100 percent benchmark, except for the two exceptional years, 2008 and 2011.

“The lower ratio in 2008 was owing to the decline in the country’s reserves midst the global financial crisis. In 2011, the drop was mainly due to the utilization of reserves to ease the heavy foreign exchange demand in the domestic market, which emanated from the high volume of petroleum import bills due for settlement,” the Central Bank said.

The comprehensive metrics by IMF captures foreign currency drains such as falling export earnings, sudden termination of rollingover opportunities of ‘short-term debt, outflows from other portfolio liabilities and capital flight from the country as measured by ‘broadmoney’ (M2).