Foreign reserves fall by US$ 300mn to US$ 5.5bn in Nov.

• Official reserves give four months import cover
• CB continues to remain net purchaser of forex 
• Forward rates suggest rupee strengthening against the dollar
• SL has US$ 589mn net foreign liability in Dec. and US$ 4.7bn in 2021

Sri Lanka’s foreign reserves buffer fell over US$ 300 million to US$ 5,549.3 million by the end-November, from US$ 5,855.7 million by end-October, while the Central Bank continues to remain a net buyer of foreign exchange to prop up reserves as well as to prevent the rupee from overly appreciating. 

The current official reserves give cover to 4.0 months of imports, providing a buffer that is sufficient from a short-term foreign reserves adequacy point of view. 

However, the data suggests that Sri Lanka has a further US$ 579.8 million due in December as net foreign liabilities for settlement, which could trim the reserves in the absence of foreign exchange income to make up for it. 

The government said they are in, “advance stage of completion” for liquidity facilitation measures in the form of swap arrangements, and the second tranche of the foreign currency term financing facility from China Development Bank of US $ 700 million is expected in early 2021. 

Meanwhile, the Central Bank estimates US$ 4.0 billion savings from imports in 2020 due to lower oil prices and temporary halt on non-essential merchandise, a trend which is likely to be maintained at least in the first half of 2021.

According to official data, the import earnings for the nine months to September have come down by US$ 2,814 million to US$ 11,782 million from a year ago. The trade balance, which is a deficit, has improved from US$ 5,612 million to US$ 4,337 during this period.

The remittance income has been surprisingly robust so far this year, registering a cumulative 10-month income of US$ 5,679.5 million, up 2.6 percent from the same period last year. 

While COVID-19 nearly decimated the tourism trade, the country is gearing to re-open borders from January to welcome foreign visitors who have the potential to bring in at least US$ 3.6 billion in net income to the country at 2019 levels. 

The July re-opening of borders in Maldives saw 35,759 arrivals in November, barring visitors from China, its largest source market. 

Meanwhile, the ultra low yields of the global safe haven assets may be drawn towards Sri Lankan sovereign bond issuances, should the country decides to go for one in 2021, further assisting the country to rollover part of its foreign debt to replenish its foreign reserves. 

Interestingly, the Central Bank continued to remain a net buyer of foreign exchange from the open market through November as it bought US$ 7.4 million and sold US$ 5.0 million in its attempt to prevent the rupee from overly appreciating. 

The forward market data also suggests that the rupee is going to appreciate against the dollar. 

The one-month forward rate for a dollar was quoted at Rs.185.54 on December 11 compared to Rs.186.21 a week ago, while the three-month forward was quoted at Rs.185.40 a dollar compared to Rs.186.20 a week ago. 

Meanwhile, according to the official data, apart from the US$ 579.8 million in foreign liabilities due in December, Sri Lanka has further liabilities to the tune of US$ 4,705.2 million in the entirety in 2021, including a billion dollar sovereign bond settlement due in July.