* Heavy debt component in reserves
After running down reserves to the tune of more than US$ 4 billion since June 2011 to prop up the exchange rate, the Central Bank for the first time became a net purchaser of dollars amounting to US$ 286.62 million in June 2012, data released by the Central Bank last Thursday (Aug. 30) showed.
The trade deficit ballooned 99.6 percent from a year earlier by the end of 2011 to US$ 9,743.2 billion while private sector credit growth at 36.6 percent, was higher than what the Central Bank had predicted it would be, leading to a balance of payments problem.
Around US$ 3 billion was sold from official reserves to keep the exchange rate stable from June 2011 until the Central Bank stopped intervening in the foreign exchange market early February. During this time, Rs. 300 billion was pumped into the banking system as the dollar sales were draining rupee liquidity already hit by high credit growth.
Official reserves which stood at US$ 8.1 billion as at end June 2011 came down to a little under US$ 6 billion by the end of 2011, and continued to decline as the Central Bank continued to sell dollars.
In February this year, the Central Bank and the government could no longer ignore the pressures on the balance of payments front and was forced to abandon a politically popular policy stance of keeping the rupee artificially strong against the dollar while maintaining a loose monetary policy stance. The slew of adjustments was widely praised by rating agencies and the IMF but it heaped more than necessary short term hardships on the citizens.
Economists had seen the brewing balance of payments problem since June 2011and were heavily ostracized by the authorities who repeatedly denied the existence of such a problem.
In January 2012, a top economist employed at a government agency argued against the occurrence of a balance of payments problem on a state-owned television channel, accusing all those of saying otherwise of being politically biased and part of a conspiracy! The very next month, the Central Bank and the Treasury had to take a policy u-turn.
From January 2012 to May 2012 the Central Bank had sold US$ 1,228.02 million and it was only in June that it became a net purchaser of dollars; dollars purchased amounted to US$ 325 million, while US$ 38.38 million was sold.
While the country’s reserves position is making a strong recovery, there is a heavy debt and short term inflows content amounting to nearly US$ 3 billion.
Reserves reached its highest level in almost a year topping the seven billion dollar mark as at end July 2012, the Central Bank recently announced, with foreign direct investments reaching US$ 451.7 million during the first six months of this year, up 14.6 percent from a year earlier and worker remittances grew 17.4 percent to US$ 2.9 billion.
"Gross official reserves amounted to US dollars 6,045 million by end June 2012, while total international reserves, which include gross official reserves and foreign assets of commercial banks amounted to US dollars 7,415 million. In terms of months of imports, gross official reserves were equivalent to 3.5 months of imports by end June 2012, while total reserves were equivalent to 4.3 months of imports. In the meantime, with the receipt of the ninth and final tranche of US dollars 414 million under the IMF-Stand-by Arrangement (SBA) facility, proceeds from the fifth international sovereign bond of US dollars 1 billion and other foreign inflows, gross official reserves are estimated to have risen to around US dollars 7.1 billion by end July 2012," the Central Bank said last month.
Earnings from tourism grew 24.3 percent, year-on-year during the first half of this year to US$ 460 million.
Foreign investments in the Colombo Stock Exchange increased US$ 187 million on a net basis by end June 2012 up 379.6 percent year-on-year.
Long-term borrowings by commercial banks during January-June 2012 amounted to US$ 927.5 million. Net inflows to Treasury bills and Treasury bonds during the first seven months of 2012 amounted to US$ 842 million. Long-term inflows to the government amounted to US$ 1,084 million during the first six months of 2012, Central Bank data showed.
The expansion of the country’s trade deficit has slowed down considerably during the first six months of the year growing 11.8 percent from a year earlier to US$ 4.7 billion, with import growth slowing down to 4.2 percent to reach US$ 9.7 billion with painful measures to contain a balance of payments crisis showing positive results. However, export earnings during the first six months of the year declined 2.2 percent to US$ 4.9 billion on weak global demand, which is a worrying trend.