Foreign reserves dip in September before bond settlement

• Foreign currency assets fell US$ 777mn in Sept.
• CB had US$ 991mn foreign debt to settle in Sept.
• CB continues to remain net buyer of forex assets 

Sri Lanka’s gross official foreign reserves fell in September before Central Bank settled a billion dollar bond on October 4, but the monetary authority continued to purchase dollars from the foreign currency market.

Foreign currency assets in September fell by US$ 777.3 million as the Central Bank had US$ 991.2 million in foreign currency liabilities to be settled during the month. 

The slippage in the foreign currency assets for September occurred after the Central Bank accumulated foreign assets for three consecutive months in a raw till August as the country’s foreign exchange earnings strengthened since May amid rebound in merchandise exports, lower imports and higher than expected worker remittances.

These inflows and the lower trade deficit of US$ 2.2 billion expected for 2020 from the lower oil bill and the temporary suspension of non-essential imports will soften the impact from the disrupted inflows from tourism trade. 

The trade deficit in the first eight months fell by a billion dollars to US$ 3.8 billion, the latest data on the external sector performance of the country showed with imports shrinking by 20 percent over the same period last year. 

Sri Lanka had foreign reserves of US$ 7.6 billion at the end of 2019 and it depleted mainly due to scheduled foreign debt repayments and weak foreign inflows from merchandise exports and services caused by the pandemic. 

The current reserves are adequate to cover 4.7 months of imports to the country at a time when imports remain subdued as restrictions remain on certain goods, which are non-essential in nature and others, which can be produced at home.

While the reserves by now would have further come down as a result of the billon dollar settlement of the sovereign bond on October 2, Sri Lanka awaits the receipt of the second tranche of the US$ 1.2 billion syndicated loan from China Development Bank this month, which amounts to US$ 700 million.

Also, the government expects up to US$ 1.2 billion from multilateral and bilateral funds and another US$ 500 million from alternate bond issuances in Samurai and Panda markets. Further, talks are currently ongoing for another US$ 1.0 billion swap facility with the Reserve Bank of India. 

Meanwhile, the Central Bank has continued to be a net buyer of foreign currency as it purchased a net US$ 54.75 million in foreign exchange in September after it purchased US$ 93 million and US$ 162.5 million during August and July respectively. 

The Central Bank has maintained the value of the rupee so far this year without sacrificing its foreign currency assets as the rupee depreciated by only 1.4 percent against the United States dollar from the beginning of the year up to October 09. 

After last week’s bond settlement, Sri Lanka has only US$ 438.6 million in remaining foreign currency debt maturing during the rest of the year.