Reserves and exchange rates strong and stable:

Economy more resilient to external shocks - CB Governor

By Sanjeevi Jayasuriya

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.

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 country.

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 economy.

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 when necessary”.

“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.