Dwindling foreign reserves, increased money printing to exert pressure on rupee

„Official foreign reserves forecast to decline to US $ 5.5-6bn by year-end „Govt. likely to face around US $ 1.5bn gap in funds to service foreign currency debt

„Sri Lanka has nearly US $ 6bn foreign currency debt servicing this year „CBSL had exhausted US $ 174.30mn in defending rupee in March „Morgan Stanley estimates Sri Lanka faces US $ 4.4bn worth of net drains on its foreign exchange reserves, over next 12 months „

Sri Lanka’s rupee is expected to feel the pressure from the dwindling official foreign reserves combined with the impacts from the increased money printing towards the latter part of the year, when the demand rebounds from the current sluggish levels.

First Capital Research predicted that Sri Lanka’s official foreign reserves are likely to decline to the US $ 5.5-6 billion range, at the end of the year, from US $7.2 billion in April.

Speaking to Mirror Business, First Capital Head of Research Dimantha Mathew noted that the government is likely to face around US $ 1.5 billion gap in funds, to service foreign currencydenominated debt, which would be settled in utilising the funds in foreign exchange reserves.

Consequently, he expects the pressure on the rupee to increase from the latter part of the year, with the dwindling reserves, combined with the effects coming from the increased money printing seen so far during the year.

The New York-based multinational investment banker and financial services company, Morgan Stanley, in a recent report expressed concerns over the recent uptick in money printing by the Central Bank of Sri Lanka (CBSL).

It pointed out that the CBSL’S security portfolio increased by over Rs.200 billion versus the rise in government debt of around Rs.285 billion, since the start of March, up to April 20.

“This was primarily to inject liquidity into the system but ultimately, if these operations are not unwound, it may put pressure on the currency and as we highlighted above, FX depreciation could in turn impact the leverage metrics,” Morgan Stanley cautioned.

Further, the CBSL had exhausted US $ 174.30 million in defending the rupee in March, following the sharp depreciation of the currency against the US dollar, in the month.

First Capital Research estimates that Sri Lanka has a nearly US $ 6 billion foreign currency debt servicing obligation in 2020.