The Central Bank says official reserves exceed US$ 4.5 billion and although it exceeds IMF targets for reserve build-up, it falls short of IMF specifications as most of the inflows are short term capital inflows.
“Gross official reserves recorded US$ 3.89 billion by end August 2009. This includes short-term net inflows to Government Treasury bills of US$ 212.7 million and Treasury bonds of US$ 797.5 million and enough to fund 4.4 months of imports,” the Central Bank said in its External Sector Performance report for the month of August.
“By 13 October 2009 the gross official reserves are provisionally estimated to have further improved to approximately US$ 4.5 billion. The significant growth in reserves was mainly due to the continuous absorption of foreign exchange by the Central Bank whereby from end March 2009 to 15 October, the Central Bank has absorbed US$ 2,529.3 million from the foreign exchange market,” it said.
Dealers said most of the dollar inflows in recent times have been short term capital inflows, and not export or remittances proceeds, although both have grown year-on-year in August.
The IMF review mission that visited Sri Lanka recently said that short term capital flows would not be considered to achieving the IMF target of building enough reserves to finance imports for 3.6 months by 2011.
Earlier this month, the Central Bank issued the following statement: “The key targets and structural benchmarks as agreed with the IMF as at end September 2009 was comfortably achieved by Sri Lanka. The Net International Reserves (NIR) target was well exceeded with gross official reserves rising to US dollars 4.2 billion (equivalent to 4.7 months of imports) by end September 2009.”
A senior official of the Central Bank said that while reserves include short-term capital that the IMF is not willing to consider, Sri Lanka still achieved the target for reserves at end September.
“This is because the IMF set a reserve target less than what we had in December. They never expected inflows to improve the way it did after the war. So even if we were to deduct the short term inflows our reserve position was well ahead of the IMF target for September,” a senior Central Bank official said.
Dealers said the rupee was strengthening against the dollar, although it was weakening against a basket of other currencies.
The exchange rate is kept stable through Central Bank intervention at around 114.80/85 range but in real terms the rupee is gaining against the dollar, dealers said.
The maintaining of a stable exchange rate, dealers said, would be beneficial to exporters as the dollar losses its strength in global markets and importers too could expect to benefit knowing the rupee would not depreciate.
Some dealers said the exchange rate could appreciate to around the 112 mark by the year end, provided no intervention took place.
Exporters were seen to be booking forward while exporters remained dormant.
Dealers said there was some forward exchange trade taking place last morning in anticipation of investor pullout because of Raj Rajaratnam’s arrest in the US for insider dealing. He owns considerable stakes in local listed companies.
“There was some panic driven speculation in the forwards market in the morning but it had subsided by afternoon,” a dealer said yesterday.