September forex reserves edge up

• US $ 60mn added to Sept. reserves from Aug.
• Reserves at end-Sept. at US $ 1.77bn, compared to US $ 1.71bn 

Sri Lanka’s usable foreign exchange reserves, which stood just above zero levels for most of this year, causing the current economic meltdown, have shown semblance of rebuilding, as September reserves edged up a little, due to continuous contractions in the trade deficit, uptick seen in the inflows from remittances and other inflows to the current account of the balance of payment. 

The latest external sector data showed the official reserve assets of the Central Bank had added US $ 60 million to end-September, with US $ 1,777 million, after the reserve buffer touched a nadir in August at US $ 1,717 million, starting the year with a total reserve asset of US $ 3,193.3 million. 

The usable reserves are however only a fraction of the headline reserve number, as yuan- denominated swap line from the People’s Bank of China, with a dollar equivalent of US $ 1.4 billion, has conditions on its usability. 
Reflecting some easing in the tighter foreign exchange liquidity conditions, which prevailed through July this year, the Central Bank in August turned a net purchaser of foreign exchange in the domestic market, after 11 consecutive months, when it managed to purchase a net US $ 15.02 million.  The data relating to the Central Bank’s intervention in the domestic foreign exchange market for September are yet to be available.  However, the Central Bank last week acknowledged that the policies that it had instituted since April this year by the synchronised tightening of the monetary and fiscal policies were starting to deliver the intended results by way of shrinking the trade deficit while incentivising the other inflows to the current account.  Besides the months-long decline in the trade deficit, Sri Lanka also saw rising inflows to the current account via worker remittances, government securities and equities as of late. The recovery in the tourism-related earnings is also anticipated in the upcoming travel season.  “Foreign exchange liquidity in the domestic banking system recorded some improvements supported by increased inflows in the form of export proceeds and worker remittances,” the monetary policy review statement issued last week said.  “Such improvements in foreign exchange liquidity conditions, despite underlying pressures in the foreign exchange market, are expected to facilitate the continuous provision of essential imports, including fuel, coal and other commodities in the period ahead. Meanwhile, the weighted average spot exchange rate remains unchanged since mid-September 2022, due to relatively low volume of transactions in the interbank spot market,” it added. 

While under an International Monetary Fund-backed programme, Sri Lanka has to rebuild reserves from the non-borrowed sources such as purchases made from the domestic foreign exchange market, the government also eyes to sell some key loss-making state-owned enterprises as part of the structural economic reforms. Such proceeds will be added to bolster reserves in the short term.