Sri Lanka’s foreign reserves position improves further in August

• Official reserve assets up by US$ 344.7mn in August, after recording US$ 407.4mn in July
• Foreign reserves position at end-August at US$ 7.44bn adequate to cover 4.7 months of imports

Sri Lanka’s official foreign reserves, often used to gauge the strength of a country’s external position, continued to accumulate assets during August as the Central Bank remained a net buyer of foreign exchange in the forex market, but the trend could lose momentum as country is set to settle part of its debt as early as next month.

Sri Lanka’s official reserve assets rose by US$ 344.7 million during August, after rising by 407.4 million during July, elevating the total reserve position by the end of month to US$ 7, 440.5 million, the latest data for the month showed. 

Sri Lanka had US$ 7.6 billion foreign reserves at end-2019 and it depleted mainly due to scheduled foreign debt payments 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 have been imposed on certain goods, which are non-essential in nature and can easily be produced at home. 

The controls on imports currently in place, lower oil bill and the robust export performance since May have provided the Central Bank more space to manage reserves and maintain currency from depreciating at excessive levels. 

In fact, the Sri Lankan rupee has depreciated by only 1.68 percent year-to-date from Rs.181.57 to Rs.184.62 against the United States dollar. 

The three months forward rate, a closer gauge of the expectations of where the rupee would be, points to a depreciation of Rs.185.12 against the dollar compared to Rs.186.15 in the week earlier.

The Central Bank has maintained the currency stability so far during the year without sacrificing its reserves.  With the August position, the increase in the foreign reserve buffer has continued for three months beginning June. 

While the latest foreign asset accumulation was possible predominately due to the Central Bank buying foreign exchange in the market, in July the reserves received a boost from the receipt of US$ 400 million swap facility from the Reserve Bank of India. 

During August, the Central Bank bought foreign exchange worth US$ 121 million while it sold US$ 28 million into the market, continuing to remain a net buyer of foreign exchange from open markets. 

In July, the Central Bank purchased US$ 162.5 million from the foreign exchange market.

The reserves position could however weaken in October when the Central Bank settles a billion dollar sovereign bond due on October 4, 2020.  

In recent times, Sri Lanka’s foreign bonds gained in value as yields declined from their highs reached during April, in a sign that investors are settling after the coronavirus induced market tumult and rebuilding confidence on the Sri Lankan economy. 

According to data, for the next three months from September through November, Sri Lanka has US$ 2.1 billion in foreign currency loans, securities and deposits up for maturity, which include US$ 1.7 billion in principal payments and US$ 372.2 million in interest. 

Allaying fears on the country’s ability to meet all its debt obligations falling due this year, the Central Bank reiterated that the current reserves position and the upcoming swap lines would place them in a comfortable position to settle foreign obligations.