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ECONOMYNEXT – Sri Lanka’s central bank has bought 484.8 million US dollars from forex markets in the first two months of the year, official data show as the monetary authority continued to operate deflationary policy.

The central bank bought 245.3 million US dollars from banks in January 2024 and 248.5 million in February with only 9 million dollars in sales, data show.

The central bank is operating deflationary monetary policy, mopping up inflows from dollar purchases at an appropriate market interest rate that reduces domestic credit and investments and allows dollars to be collected for external payments.

Despite the 484.8 million dollars being bought over two months, gross official reserves only went up 29 million US dollars from 4,491 million dollars in December to 4,520 million dollars in February.

Gross official reserves also include fiscal balances of the Treasury, which may rise when IMF or other budget support loans are given and fall when loans are repaid.

“There are certain debt service payments,” Governor Weerasinghe explained to reporters earlier this month.

“The government is continuously servicing ADB, World Bank loans as well as the central bank servicing its ACU liabilities.”

Any debt service payments outside an identified perimeter are also going through, which led to a small increase in gross reserves, he said.

Some emergency loans taken after a default was declared are expected to be serviced.

Though the central bank repaying its loans to India and the International Monetary Fund does not increase gross reserves, the payment improves the agency’s net reserve position as dollar liabilities are paid down.

The central bank’s net foreign assets position which was about 4.4 billion US dollars negative in August 2022 was reduced to about a 2.2 billion dollars by February 2024.

Central bank data shows that it had repaid 179 million US dollars to the International Monetary Fund on loans taken during an earlier bailout over 2024, and 350 million dollars in swaps.

Related Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction

Commercial Banks have also repaid credit lines or collected dollars over the past year. Central Bank data shows that banks have settled about 1,808 million dollars over the past year. (Colombo/Apr02/2024)

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