Sri Lanka central bank reserve outflow continues; bill stock spikes to Rs40bn

Oct 19, 2008 (LBO) – The treasury bills portfolio of Sri Lanka's central bank topped 40 billion rupees (370 million US dollars) by mid-October, according to the latest official data, indicating a continuing drain of foreign reserves. The central bank has been defending a US dollar peg at 108 rupees and injecting money into the domestic banking system to make up for liquidity that is disappearing from the banking system when dollars are sold.

In September alone the central bank lost 202 million dollars defending a US dollar peg.

Sri Lanka's central bank has set quantity targets for the monetary base or reserve as a method of bringing down inflation.

Domestic Asset Increases

The monetary base, which is a liability of the central bank, is made up of money in circulation and deposits of commercial banks in the central bank, called statutory reserves.

The monetary base is driven by foreign currency purchases or domestic asset acquisitions - usually treasury bills of the government of Sri Lanka – on the asset side of the central bank balance sheet.

On October 17 the central bank's Treasury bill stock was 37 billion rupees, down from 40 billion rupee a day earlier, despite a statutory reserve ratio