Foreign reserves dwindle to US$ 4.8bn end-January

• CB settles US$ 971mn worth of foreign currency denominated loans
• CB says foreign reserves not the only metric to ascertain a country’s debt servicing ability 
• SL currently negotiating 2 swap facilities worth US$ 2.5bn with China and India 
• CB expects to end 2021 with US$ 5.5bn, down from US$ 5.7bn end-2020

The gross official reserves fell by US$ 850 million during January 2021 as the Central Bank settled US$ 971 million worth of foreign currency denominated liabilities due in the month. 

Foreign currency reserves, the standard gauge used to appraise the strength of a country’s external sector, declined to US$ 4.8 billion by end-January from US$ 5.7 billion in December 2020. 

While critics point at dwindling reserves as testament to the country’s falling economy, and express doubts over the country’s ability to settle its foreign currency loans, the Central Bank last week dismissed such views claiming that foreign reserves aren’t the only measure to ascertain a country’s ability or inability to honour its debt obligations.

Labeling such accusations as sheer politically-motivated slogans to derail the country’s forward march by parties with vested interests, the Central Bank Governor Prof. W.D. Lakshman stressed the detractors must appreciate the ‘alternative policy path’ being followed since December 2019, even before any sign of a pandemic. 

“It is important to note the government’s determination to move away from the heavy dependence on imports for foodstuffs,” Professor Lakshman said. 

“That is indeed a really significant long-term policy approach despite an adverse impact in prices in the short run,” he added. 

The January headline inflation as measured by the Colombo Consumer Price Index (CCPI) eased to 3.0 percent from 4.2 percent in December 2020, and the Central Bank’s projections show the mid-term inflation would remain 4-6 percent range.

However, the data showed that the Central Bank had to sell US$ 72.25 million dollars in the domestic foreign exchange market to defend the rupee as the currency nearly touched Rs.200.00 for a US dollar in January before regaining some lost ground in recent weeks. 

Sri Lankan rupee closed at Rs.194.50/195.50 for a US dollar in the one-week forward market last Friday while the one-month forward market closed firmer at Rs.194.45 for a dollar on February 12.

Sri Lanka settled US$ 970.6 million foreign currency liabilities in January with US$ 564.7 million due from February through April. 

Sri Lanka is currently negotiating two swap arrangements for US$ 2.5 billion with India and China, while US$ 700 million is due from China Development Bank as the second tranche of the US$ 1.2 billion facility approved at the onset of the pandemic in March last year as fiscal support. 

The Central Bank last week gave a list of expected foreign inflows for this year, and projected the gross officials reserves to end the year with US$ 5.5 billion, lower than US$ 5.7 billion in 2020.