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Foreign reserves blown up on borrowed money
View(s):Economists say Central Bank policy cannot sustain a stable rupee against US dollar
A build-up in Sri Lanka’s foreign reserves over the past year by around US$2 billion is based on borrowed cash and is unsustainable in the long term towards ensuring a stable rupee against the US dollar, economists said. The US dollar, Sri Lanka’s main trading currency, has been moving in the range of around Rs. 127-128 since January this year compared to Rs. 121 in March last year.
“Our foreign reserves have been boosted by some $2 billion in borrowed cash and that’s not the way to be competitive in the market. We need to be earning dollars, not borrowing,” said a top economist, who declined to be named.
Earlier this week, the Central Bank (CB) said the balance of payments continued to record a surplus with a comfortable overall surplus anticipated this year. The CB said it had bought $486 million from the money markets so far this year while the stability of the exchange rate had been enhanced by increased foreign exchange inflows to the government securities market, and from tourism and private transfers.
Foreign exchange dealers in the market also said the rupee had seen little change against the dollar over the past few months and the fact that the CB was buying in the market meant there was a surfeit of dollars. The CB generally buys dollars from the market to ensure there is no surplus dollars that would then weaken the dollar (and affect exporters) and ramp up the rupee, or when there is an urgent need (from the CB) for dollars. The regulator’s role is to ensure there is a balanced equation in the market so as to support the needs of both exporters and importers.
“The market has been flat,” noted one dealer. Over the past year (since mid-2012), the country’s foreign reserves have been boosted by a $1 billion bond sale, $415 million from the final tranche of an IMF standby loan and borrowings by private commercial banks. The CB is encouraging commercial banks to independently borrow overseas and the state-owned National Savings Bank (NSB) recently said it was floating a $1 billion bond. The opposition says the NSB injection is to fund government spending.
The economist said that trade inflows (earnings from exports) and capital inflows (foreign investment) ensured a competitive economy. “But when the main inflows are from borrowed cash (as it is in Sri Lanka’s case) then the country becomes uncompetitive,” he added.
The CB said that total international reserves which included gross official reserves and foreign assets of commercial banks amounted to $8.3 billion by the end of last year.
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