Sri Lanka’s forex reserves rose one by almost a billion rupees, to 7,706 million dollars by end August 2017 from 6.7 billion US dollars in July, data from the state debt office shows.
Sri Lanka’s forex reserves are made up of monetary reserves collected by the central bank by dollar purchases and mopping up rupee liquidity that s created in the process, and also fiscal reserves which are kept as US dollars.
In August the central bank had bought about 200 million dollars from commercial banks, according to published data.
In August the central bank’s Treasury bill stock, purchased in 2015 and 2016 with printed money to create the last balance of payments crisis, was sold down from 137 billion rupees on July 31 to 90 billion rupees by August 31,
Excess liquidity rose from 11 billion to 46 billion rupees, from dollar purchases, over and above the sterilized sales, indicating that more than 500 million dollars had been purchased from commercial banks and inflows to the Treasury.
The sell-down of Treasury bills to mop liquidity creates a virtuous cycle of reducing credit and ensuring that inflows to banks (as new deposit from exporters and remittance receivers who convert dollars and others including loan repayers) are lower than the total credit extended.
In a balance of payments crisis, the central bank by printing large volumes of money to enforce a lower-than-market rate to maintain its de facto peg, generates excess credit and imports, creating a credit bubble and economic output volatility.