Central Bank sells down gold reserves to boost liquid forex reserves

Sri Lanka has sold down a significant part of its gold reserves, which form part of its foreign exchange reserves during December 2021.

The specific intentions behind the sale remain unclear as of now as some claimed that it was to make liquidity to meet the upcoming foreign currency obligations, while others called it as part of the basic reserves management by the Central Bank. 

According to the reserves data for December, the Central Bank had sold down US$ 207 million worth of gold bringing the gold stock down to US$ 175.4 million compared to US$ 382.2 million in November. 

The December selldown measures to around 3 metric tonnes of gold and the Central Bank has been trimming its gold reserves for some time.

The Central Bank typically maintains around 19 metric tonnes of gold reserves, but in February 2020, just before the pandemic entered the country, it sold 13 metric tonnes of gold for US$ 1,600 claiming it was intended for a portfolio adjustment potentially expecting to buy back when prices fall. 

But, the gold prices never fell to that level again as the investors fled to safe haven assets ever since the pandemic took hold.

On January 7, 2022, gold was trading around US$ 1,796.50, up 0.41 percent on Friday but down 1.71 percent year-to-date.  

Central Bank Governor Ajith Nivard Cabraal was quoted having said that the sale was intended at boosting the liquid reserves but had fallen short of saying what the liquid reserves are for.
The gold selldown however doesn’t change the total foreign currency reserves unless the Central Bank provides dollar liquidity to the domestic foreign exchange market because it only changes the balances between the constituents of what total foreign reserves form.  

As at December 31, 2021 Sri Lanka’s foreign currency reserves were at US$ 3,137.6 million compared to US$ 1,588.4 million in November as a result of the drawing down of the Yuan denominated swap with China. 

Economists expressed divergent views on the latest sale of gold reserves. 

“The objective of sale isn’t to buy back but to convert it to liquid cash so that it can be used to meet debt repayment and other urgent payments,” former Central Bank Deputy Governor and economic commentator Dr. W.A Wijewardena tweeted.  

Another economist however said sale could be part of the Central Bank’s basic reserve management process and shouldn’t cause alarm. 

Sri Lanka is confronted with its worst foreign exchange crunch and a large group of economists are urging the authorities to engage with its international creditors for debt re-structuring without burning anymore foreign currency for debt repayment. 

They say such a move could prevent the people undergoing hardships stemming from food and medical drug shortages, and soaring prices.