Foreign reserves gain over US$ 400mn in July

• Total foreign reserves at US$ 7.1bn by end-July
• Provide about four and half months import cover
• CB receives US$ 500mn from RBI under swap arrangement 
• SL had US$ 7.6bn foreign reserves at end-2019

Sri Lanka’s official foreign reserve, often used gauge external sector strength, increased by US$ 407.4 million during the month of July, bringing the total reserves position to US$ 7.1 billion by the end of the month as the Central Bank took receipt of US$ 500 million from Reserve Bank of India (RBI) through a swap arrangement. 

Sri Lanka had US$ 6.7 billion worth reserves by the end of June 2020.  

Sri Lanka had foreign reserves worth US$ 7.6 billion at the end of 2019 and the fall in reserves was mainly due to scheduled foreign debt payments and weak foreign inflows from merchandise exports and services hit by the pandemic. 

Current reserves provide about four and half months of import cover and the imports remain subdued due to lower aggregate demand and certain import restrictions in place mainly on non-essential goods.

After remaining volatile from mid-March to mid-April, Sri Lankan rupee recorded a notable recovery thereafter. 

During the year up to August 7th, the Sri Lankan rupee depreciated against the US dollar by 2.1 percent to Rs.185.38. The three months forward rate for the rupee/dollar rate is Rs.186.01, pointing to a limited depreciation in the currency. 

The Central Bank on July 09 said the stability of the rupee had been achieved without sacrificing reserves and its net interventions would become zero in the foreign exchange markets in a matter of days. 

Allaying fears of the country’s ability to meet all its debt obligations falling due this year, the Central Bank reiterated that the current reserve position and the re-forecasted foreign earnings plus the coming swap lines place them in a comfortable position to settle the foreign obligations. 

During the first four months, the Central Bank settled foreign loans amounting to US$ 1.6 billion and has US$ 3.3 billion to be settled in the remainder of the year, including the billion dollar sovereign bond coming up for maturity in October. 

With the settlements of dollar borrowings from May to July, the remaining debt obligations for the remainder of the year could even be lower. 

While Sri Lanka might receive some relief on foreign debt as deferments, the country is also negotiating with the International Monetary Fund (IMF) and other multi-lateral and bi-lateral partners for more funds.   

Some small size grants have already come to help Sri Lanka to emerge from the pandemic-caused economic hardships. 

Further, the outright ability to form a stronger government by the party of President Gotabaya Rajapaksa, which won a two-thirds majority in the legislature at the last week’s polls, will also rekindle confidence about the political stability and policy consistency for the next five years among international investors for both long-term direct investments and portfolio flows.