Official data released recently indicates that Sri Lanka's gross official reserves witnessed a slight increase to 4,517 million US dollars in February 2024 compared to 4,496 million US dollars in January.
Gross official reserves encompass fiscal balances, typically borrowed funds except for privatization proceeds, and monetary reserves, serving as assets for the central bank. The reserve collecting central bank is anticipated to acquire reserves against perpetual interest-free liabilities or through the outright sale of domestic assets.
Analysts point out that post-1960s, Sri Lanka's central bank adopted inflationist measures, including borrowing dollars through central bank swaps initiated by a desperate Federal Reserve to mitigate gold losses caused by mistargeted interest rates, deviating from classical economic principles.
Sri Lanka's central bank established swap lines with the Reserve Bank of India and the People's Bank of China, and lately, swaps with domestic market participants surged, while the net change in swaps is partly attributed to state bank repayments.
However, borrowing dollars through swaps could lead to rate mis-targeting and potentially result in money printing if private credit expands while overnight rates remain narrowly targeted, as observed in recent years.
The central bank's liabilities include obligations to India, the International Monetary Fund, and interest payments it must fulfill. Notably, there has been an improvement in the net foreign assets of the central bank, indicating a reduction in external liabilities and rupee appreciation.
The central bank had previously depleted its reserves due to mis-targeted rates under flexible inflation targeting/potential output targeting and borrowed to sustain artificially low rates until around mid-2022.
