Sri Lanka spends Rs11bn to sterilize liquidity

Jan 31, 2010 (LBO) - Sri Lanka's central bank has spent about 11 billion rupees last year to sterilize excess liquidity generated mainly from external sources, and existing excess liquidity is not a threat at the moment, officials said. A large stock of foreign reserves, significantly higher than the local monetary base, can make seigniorage losses for a central bank until the interest rate differential narrows. By December Sri Lanka had foreign reserves of 6.6 billion rupees, according to Central Bank data.

Cabraal said the cost of sterilizing rupee liquidity was about 11 billion rupees last year.

By January excess rupee reserves in the banking system, deposited daily at the Central Bank was 125 billion rupees.

Cabraal said several other central banks were also facing the same issue and Sri Lanka was not alone.

The US Federal Reserve has record levels of excess reserves which are about half the monetary base. In Sri Lanka it is about one-third.

The Federal Reserve has come under fire for firing a fresh global commodity bubble by its lax policies pushing global food prices in particular to record highs amid a weakening dollar.

K D Ranasinghe, director of economic research at the Central Bank said though the mo