Sri Lanka CB Governor not worried about drop in forex reserves

Jan 27, 2015 10:51 AM GMT+0530 |

COLOMBO (EconomyNext) - Sri Lanka's recent drop in forex reserves were partly due to election related events and a decline in global demand and he was "not at all worried", Central Bank Governor Arjuna Mahendran said.

"This is endemic to the elections - the political process," Mahendran said. "Reserves have been falling partly because of global demand. Japan got into a technical recession in the last two quarter of 2014. In Europe also we saw weakness."

"External demand has been weak particularly in Europe and Japan. In the US of course it is now picking up. So I think in the garment exports we will see a pick up and in selective commodities. I think coconut exports have picked up very strongly in the last year. Of course that is a small amount.

"But that is a sign that our agricultural exports will remain in demand, including tea."

Sri Lanka's reserves drop in the last quarter was partly due to sales of rupee bonds by foreigners, a strong pick up in state and private credit and repayments to the International Monetary Fund which hits central bank reserves directly without involving the domestic credit system.

In January there was a delay in rolling over a 500 million US dollar sovereign bond which was also repaid at a cost to reserves.

But the new administration will go to bond markets again in February, Mahendran said. A bond sale usually boosts reserves as dollars are converted to rupees, but the forex can also eventually go out when the rupees are spent or fresh credit is given, generating imports.

In Sri Lanka the central bank sells debt on behalf of the Treasury.

"We will have to continue to rely on markets to fund the deficit," Mahendran said. "Of course the deficit will shrink." The falling deficit will signal that the country's fiscal house in put in order, he said.

He said the IMF repayments were a legacy of problems seen at the end of the war and the country had no balance of payment troubles at the moment and global interest rates were low.

"We should take advantage of that we should fund our requirements from the markets at reasonable rates of interest," Mahendran said.

He said a relationship will be strengthened and get their 'seal of approval' for Sri Lanka's policies.

"Because at the end of the day the IMF is seen, along with rating agencies as an impartial international observer of how we conduct our economic policies."