Central Bank acquires Gold from the IMF
As a part of the diversification of the external assets portfolio of the Central Bank of Sri Lanka (CBSL) into various safe financial instruments,the CBSL has been acquiring Gold from the international market over the past several months. In fact, many central banks maintain a certain portion of its external reserves in Gold, since Gold is one of the commodities which provides an anchor for long term stability of reserve assets.
In keeping with this objective, the Central Bank recently acquired 10 metric tons of Gold at a cost equivalent to USD 375 million from the International Monetary Fund. Through such acquisition, the long-term stability of Sri Lanka’s external reserves will be strengthened, since the Gold holdings will provide a stable and long-term cushion against the impact of any potential volatility in major international currencies and financial instruments, in international financial markets.
The gross official reserves of Sri Lanka now exceed US dollars 5.2 billion, which is sufficient to finance 6.4 months of imports.
Sri Lanka needs monetary tightening to head off inflation spike: economists
Nov 25, 2009 (LBO) – Sri Lanka’s inflation may top 10 percent next year unless corrective action is taken, and recent trends in the island’s most widely watched index should not make policymakers complacent, economists have said.
Prices in Sri Lanka’s capital, measured by a revised Colombo Consumer Price Index, rose 1.4 percent in October from a year earlier, and 24.3 percent in October 2008.
“But, every month, the index value rises by closer to 1.0 percent and, therefore, by this time next year, the index should rise by about 10 – 12 percent,” W A Wijewardene, a top monetary economist, and former deputy governor of Sri Lanka’s central bank wrote in his WatchTower column on LBO.
“So, as the past experience has shown, the slow growth in NCCPI (New Colombo Consumer Price Index) will not become sustainable unless the Central Bank tightens, rather than loosens, its monetary policy.”
The index which dipped to 201.0 points in April is now at 209.4.
Sri Lanka’s central bank has been steadily pulling out excess liquidity from money markets amid low private sector credit growth and foreign inflows, triggered partly by low US interest rates.
Sri Lanka’s rupee has a peg to the US dollar and therefore ‘imports’ US monetary policy and inflation.
Short term rates are now around the Central Bank’s repo rates, which drains liquidity from markets, rather than the reverse repo rate at which money is injected.
The repo rate was cut by 50 basis points to 7.50 percent in October and the reverse repo rate to 9.75 percent from 10.50 percent.
The trade deficit contracted for the ninth consecutive month in September 2009
The trade deficit contracted for the ninth consecutive month in September 2009 by 62.2 per cent to US dollars 220 million. The cumulative trade deficit decreased by 60.0 per cent to US dollars 1,848 million during the first eight months of 2009 from US dollars 4,615 million in the
corresponding period of 2008. Workers’ remittances increased by 10.3 per cent to US dollars 2,481 million during this period. As a result, Workers’ remittances during the first nine months of 2009 were US dollars 634 million (about 34 per cent) in excess of the trade deficit.
Earnings from exports, which took on an increasing trend since April 2009 reversed in September following the usual seasonal pattern. Accordingly, export earnings in September 2009 amounted to US dollars 568 million reporting a decline of 12.8 per cent, year-on-year.
Expenditure on imports declined by 36.1 per cent to US dollars 789 million in September 2009, reflecting lower demand across all three major categories of imports.
The gross official reserves, with and without Asian Clearing Union (ACU) funds, recorded US dollars 5,045 million and US dollars 4,822 million,
respectively, by end October 2009. This includes short-term net inflows to the Government Treasury bills of US dollars 247 million and Treasury bonds of US dollars 1,069 million. Based on the previous 12 month average imports (US dollars 824 million per month), the gross official reserves, with and without Asian Clearing Union (ACU) funds, were sufficient to finance 6.2 and 5.9 months of imports, respectively.
By 20 November 2009, the gross official reserves, excluding ACU receipts, are provisionally estimated to have further improved to US dollars 5.2 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 23 November, the CBSL has absorbed US dollars 2,837 million from the foreign exchange market, on a net basis, followed by the receipt of US dollars 331 million as the second tranche of IMF SBA facility.