CB ensures stability amidst global turmoil

During the first eight months of this year, the Central Bank absorbed a substantial volume of US dollar liquidity amounting to US$ 622 million in order to deal with any adverse shock that could arise from a sudden withdrawal of foreign currency from the system for any reason, including a worldwide liquidity short supply.

Such timely action was to some extent, due to the prudent retention of a large part of the capital inflows that took place when the Treasury Bill and Bond markets were opened for foreign investments. The accumulation of foreign currency on that basis also substantially increased the international reserves of the Central Bank.

Under the present turbulent environment, there has been the natural outcome of the liquidation of a certain part of the foreign investments in Government treasury bills and bonds by some foreign investors, who have had to cover their own positions, due to the financial crises in their own economies. While these demands have been comfortably accommodated so far, the Central Bank also stands ready to accommodate any further outflows, if such outflows arise at any time in the future.

In the meantime, the current reduction in oil and commodity prices is expected to ease the pressure on future outflows substantially over the next couple of months and the normal increase in remittances which takes place during the months of November and December is further expected to reverse the overall dip in foreign currency reserves that has taken place so far in the month of October.

The impact of the postponement of the payments due on petroleum bills under the extended credit facility of the Iranian Government (from 4 months to 7 months) is also expected to ease the pressure on the foreign exchange market during the next couple of months. These favorable trends are expected to result in continued stability in the foreign exchange markets.

The recent decline in the Rupee liquidity resulting from the regular supply of foreign exchange into the market by the Central Bank has also been addressed by several policy measures. First, the relaxation of the statutory reserve requirement; second, the relaxation of the limit on the access of commercial banks and primary dealers to the reverse repurchase window of the Central Bank; and third, the purchasing of Treasury Bills in the primary market by the Central Bank within the leeway available in the reserve money programme.

These indicates that the continuous monitoring, precautionary actions and timely interventions by the Central Bank of Sri Lanka to ensure stability in the Sri Lankan financial markets has ensured that the Sri Lankan economy maintains stability and is able to withstand the current turbulent global financial markets, with confidence.

Even in the future, the Central Bank would continue to monitor the conditions carefully and respond to the needs of the economy with suitable interventions, if and when any further interventions are required.