Sri Lanka’s foreign exchange reserves has come under scrutiny following a recent drop in official figures, with opposition politicians alleging dollar sales by the central bank to defend the local currency, while monetary authorities attributed the decline to elevated import demand.
Opposition Member of Parliament Ravi Karunanayake noted that gross official reserves dropped from 6.8 billion dollars to 6.4 billion dollars, moving away from the year-end target of 8.9 billion dollars outlined under the International Monetary Fund (IMF) program.
“Dropping it to 6.4 billion suggests that they are selling dollars to protect the rupee—meaning they are selling off dollars to prevent depreciation,” Karunanayake said.
Responding to queries at today’s monetary policy review, Central Bank Governor Nandalal Weerasinghe clarified that the fall in reserves was caused by higher import outflows rather than intervention to protect the exchange rate. He pointed out that monthly import expenditure had been running above 2.0 billion dollars for several months, reaching as high as 2.4 billion dollars in one month.
According to Weerasinghe, the surge in imports was driven by higher international petroleum prices, increased import volumes of vehicles and fuel—partly due to stockpiling by petroleum suppliers to maintain buffer stocks in April—and broader import expansion fueled by credit growth running at around 27 percent.
The Governor noted that while import outflows expanded, substantial foreign currency inflows are expected from multilateral lenders to boost reserve levels. The central bank recently received the fifth and sixth tranches from the IMF, with additional inflows anticipated from the Asian Development Bank (ADB) and the World Bank.
“Gross official Reserve target estimate is around to have it over 8 billion dollars by the end of the year, but there is an NIR target which is a much lower number where we take out other short-term liabilities,” Weerasinghe said.
Commenting on mid-year performance, Weerasinghe mentioned that official reserve and Net International Reserve (NIR) targets were revised for end-June and end-December to reflect market conditions. While balance sheet numbers are still provisional, the Central Bank believes it has met the revised end-June NIR target, with active market purchases and incoming multilateral receipts set to further strengthen the country’s overall reserve position going forward.
Source- Economynext
