Sri Lanka says reserve money on target, but domestic assets rise

Sep 04, 2007 (LBO) – Sri Lanka's central bank said Tuesday reserve money growth is on target, but domestic assets in the monetary base continued to rise, indicating a further weakening of international reserve backing for the local currency. However analysts say Central Bank attempts to stabilize the economy has been undermined by a fiscal problems and its inability to effectively carry out monetary policy with an artificially low policy rate, which gives wrong incentives to the banking system. Reserve money for the end of August 2007 was 257.1 billion rupees and the monthly average was 254.7 billion rupees.

"This is below the September target of 257.8 billion, which could be achieved as a consequence of the continuation of the Central Bank's tight monetary policy," the Central Bank said.

"The growth rate in broad money supply is also expected to fall following the decelerating trend in reserve money."

However other analysts have pointed out that reserve money growth has been moderated by a loss of international reserves and it was not due to tight monetary policy.

Reserve money, or base money, is made up of rupees issued against net foreign assets of the central bank and loans to government such as treasury bills and pr