IMF reserve target does not include borrowings

The IMF says it would not consider borrowed funds built up in Sri Lanka’s foreign exchange reserves although increased foreign investments into government securities is a positive sign. It says it will focus on a narrow definition of reserves built up through external trade and remittances.

The Central Bank estimates reserves to be over US$ 4 billion and dealers say it could soon reach US$ 5 billion driven by foreign investments into government securities, but this may not be what the IMF is looking at.

Each month the Central Bank releases the external sector performance which gives the gross official reserves held by the Central Bank.

In its latest issue, gross official reserves for the month of July was close to US$ 2.2 billion, to finance 2.4 months of imports, and the Central Bank estimated reserves could now be over US$ 4 billion.

"Total net foreign inflows to the government Treasury bills and bonds since mid May 2009 to 11 September 2009 amounted to US$ 1.2 billion," the Central Bank said last week releasing the external sector performance for July.

"Since end March 2009, up to 9 September, the Central Bank has absorbed US$ 1.9 million from the market. Accordingly, gross official reserves have been estimated to exceed US dollars 4 billion by 10 September," it said.

The bank said this factoring in the approval of the new general and special allocations of Special Drawing Rights (SDR) by IMF on 28 August and 09 September 2009 where Sri Lanka received SDR 324.6 million (approximately US$ 508 million).

But the IMF would be monitoring the build up of net official reserves and not gross reserves.

Brian Aitken, Mission Chief for Sri Lanka of the IMF’s Asia and Pacific Department who was in Sri Lanka with a team of officials conducting the first review of the US$ 2.6 standby facility programme, said the IMF would monitor the net reserve position.

"The target under standby facility is based on net reserves, not gross reserves. We will not consider investments in to government Treasury bills and bonds," he told journalists last Tuesday.

"This is done in order to ensure the viability of Sri Lanka’s external sector based on non-borrowed reserves," Aitken said.

In the second half of 2008, Sri Lanka’s reserves took a hit after the global financial crisis caused more outflows than inflows. In July 2008, gross reserves stood at US$ 3.5 billion. By end 2008, reserves declined to US$ 1.7 billion.

A balance of payments crisis was looming, and according to the Central Bank, the government accepted the IMF’s offer for a standby facility for balance of payments support.

According to the agreement with the IMF Sri Lanka has to build enough reserves to finance imports for 3.5 months by 2011.

Soon after the war ended, and partly because the IMF approved the US$ 2.6 billion facility, foreign exchange inflows increased based on positive sentiments.

"Foreign inflows keep coming in and most of it is hot capital. The rupee is under pressure to appreciate and if left alone, the exchange rate against the dollar could be around Rs.100," dealers said.

However, they expect more long term investments to come in the future and Aitken said foreign investments into long term government bonds was a positive sign that investors are willing to take a stake in the country’s long term prospects.

Aitken said the Central Bank was also building reserves to cushion possible outflows, as Treasury bills and bonds can easily be sold in the secondary market and cause a ‘flight’ of foreign exchange.

"This is the right thing to do," Aitken said.

Sri Lanka’s external sector is beginning to see signs of improving and Aitken acknowledged that exports and private remittances are on the increase.

According to the last report on the country’s external sector performance, the Central Bank said the trade deficit contracted for the seventh consecutive month in July 2009 by 37.3 percent.

Private remittances increased by 6.5 per cent during the first seven months of the year and export earnings in July recorded the highest earnings since the beginning of the year.

www island.lk

Copyright©Upali Newspapers Limited.

Hosted by


Upali Newspapers Limited, 223, Bloemendhal Road, Colombo 13, Sri Lanka, Tel +940112497500