The forex reserves of Sri Lanka decreased by $164 million in August 2023, reaching a total of $3,598 million, according to official data.
This marked a departure from several months of steady reserve gains. The drop in reserves was attributed to the repayment of a swap borrowed from Bangladesh's central bank.
The central bank's shift to an ad hoc peg regime, similar to a flexible exchange rate found in IMF-prone countries, contributed to a decline in reserve collections. This regime has raised concerns among analysts, as it goes against the principles described by classical economists and can undermine confidence.
Moreover, the inflow of funds into rupee bonds ceased during this period. Prior to the adoption of the ad hoc peg regime, both the central bank and private banks were improving their negative net positions simultaneously.
In light of this, analysts have cautioned that if the central bank were to cut rates based on low inflation and engage in inflationary open market operations (printing money), its ability to collect reserves could be compromised. To accumulate reserves from current flows, which involves a net outflow of wealth from the country, domestic credit from domestic savings must be controlled.
