Reserves and exchange rates strong and stable:
Economy more resilient to external shocks - CB Governor
The tremendous achievement of reaching US $ 9 billion in foreign
reserves by the Central Bank is confirmation of the correct policies and
framework that is in place.
Governor of the Central Bank Ajith Nivard Cabraal
Speaking to the Sunday Observer, Governor of the Central Bank Ajith
Nivard Cabraal elaborated on the points which made this possible and the
impact on the country’s finances and the future.
What does US$ 9 billion in reserves mean to the economy?
US$ 9 billion in gross official reserves is a milestone. In an
economic sense, this has several positive implications to our economy.
Official reserves are a measure of external sector strength of
A greater level of official reserves mean a strong capacity for the
economy to meet short-term foreign currency obligations on account of
both payments for imports and short-term debts denominated in foreign
currency, meeting foreign currency demands from the foreign investors
who invest in government securities etc.
At present, this level of reserves is adequate to cover six months of
imports, double the accepted norm of three months import coverage. Also,
this level of reserves is more than adequate to cover the debt
obligations of short-term nature. With such improvements, this level of
reserves is a welcome development for obtaining higher ratings from
rating agencies, as it implies a strengthened external sector outlook, a
strong currency, and enhanced investor confidence.
When asked what policies enabled this success, the Governor said,
“This improvement of gross official reserves happened as an outcome of
well-crafted policy that the Central Bank and the Government implemented
in the recent years. If we go back to 2011 and 2012, we observed an
increase in imports at a higher rate than the exports.
To arrest that situation, there was a policy package which allowed a
more flexible exchange rate, among others. A flexible exchange rate
policy adopted by the Central Bank created a conducive environment to
support exports and encourage tourism. In support of that, more
initiatives were directed at export market diversification and accessing
high-end niche markets for value added products.
Meanwhile, rigorous promotion campaigns were launched abroad to
promote Sri Lanka tourism and world-class hotel chains started moving
into Sri Lanka, improving the tourism sentiment further.
At the same time, the relaxations introduced to exchange control
regulations, resulted in an increased level of foreign funds mobilized
in international markets by the local corporates.
The successful issuances of International Sovereign Bonds by the
Government channeled a substantial amount of foreign exchange into the
Meanwhile, the Government policy that encouraged skilled foreign
employment in well-paid markets brought in larger quantum of foreign
currency in recent years.”
To the question of how this will impact the rupee and the rupee
value, he said, “Maintaining a high level of gross official reserves
would help to stabilize the foreign exchange market and thereby the
external value of the rupee. During the year, Sri Lanka received some
substantial amount of foreign currency inflows.
As a result, the Sri Lankan rupee was on an appreciating trend and
this opened avenues for the Central Bank to absorb excess liquidity to
build gross official reserves, and avoid unwarranted fluctuations in the
foreign exchange market. More inflows to the foreign exchange market are
expected during the remaining period of the year, and the exchange rate
is expected to maintain its stability.”
Speaking further on what will the investors, especially foreign, see
in this development, he stated that, “The investor confidence would be
enhanced as a result of the higher reserve position of the country. As a
result, more foreign investments will be attracted to the country
enabling the country to achieve a higher growth. Investors will find the
country less risky since the high foreign reserve position enables
investors to confidently invest in the country since they will not face
any constraints to repatriate part of the gains to their own countries
“With high level of foreign reserves and exchange rate stability, our
economy will be more resilient to external shocks.
This is a welcome development and that emphasises the fact that the
country is going through a sustainable development path.
Given these developments, economic growth prospects are expected to
improve over the medium term,” the Governor said.