LNP – Foreign reserves dip to US$ 2.3bn by October-end

Down from US$ 2.7bn in Sept. as CB settles almost US$ 500mn worth foreign liabilities
Sufficient only for 1.8 months of imports
CB pins hopes on inflows announced in 6-month road map
However, Moody’s further downgraded SL in Oct. due to lack of comprehensive financing plan to repay foreign debt
Foreign exchange reserves were measured at US$ 2,267.5 million by the end of October, down from US$ 2,704.2 million in September as the Central Bank settled US$ 492.9 million worth foreign liabilities during the month. Sri Lanka is scrambling to shore up its reserves amid slowdown in inflows due to the pandemic and rating downgrades.

The October reserves touched a fresh post-war low, sufficient for only 1.8 months of imports. But, Sri Lanka has US$ 1.5 billion equivalent swap line signed with People’s Bank of China earlier in the year, which is kept as a stand by support.

The Central Bank recently tightened the foreign exchange conversion rule on both goods and service exporters to rebuild reserves from non-debt creating inflows. Exports have been on an upward momentum since June, generating over a billion dollars or close to that during last four months.

However, the remittance income, which grew constantly fell out of favour since around the same time due to the foreign exchange crunch, which gave rise to several parallel exchange rates in the unofficial channels, prompting action by the authorities to bring the situation under control and thereby re-channel remittances through the official modes.

Meanwhile, increased tourist arrivals in the months of September and October after the easing of virus related restrictions have rekindled hopes for the faster recovery in the US$ 4.5 billion tourism industry, which has the potential to alleviate much of the pressure in the country’s foreign exchange sector.

The Central Bank in early October announced a slew of short term inflows for the next six months, amounting to roughly US$ 10 billion through March next year to ride through the most challenging period of foreign exchange and economic conditions, predominantly pandemic generated. However, Moody’s Investors Service on October 28 further downgraded the country’s sovereign rating to Caa2 from Caa1 citing dwindling reserves and the expanding budget deficit as they grew skeptical over the ability realise the announced inflows.

Sri Lanka’s attempts to generate foreign income out of full or partial sale of State assets have also mired in controversy due to lack of transparency. The proposed partial sale of the coal power plant, Yugadhanawi is a case in point.

While in the first six months, Sri Lanka having received US$ 398 million worth foreign direct investments, the Board of Investment is confident of ending the year with at least US$ 900 million and over a billion dollars in direct investments in 2022.

During the three months from October through December, the country has foreign currency commitments of US$ 553.9 million. During 2022, it has foreign currency commitments of US$ 5,674.3 million, which includes two international sovereign bond settlements of US$ 500 million and US$ 1 billion falling due in January and July respectively.