Sri Lanka to Set up Exim Bank to Utilise Forex Reserves to Finance Exporters and Contractors Handling Foreign Government Deals

02nd December 2010, www.lankabusinessonline.com

Sri Lanka may use extra foreign reserves in a proposed export import bank to be set up next year to finance exporters and contractors, Central Bank Governor Nivard Cabraal said.

Governor Cabraal said earlier this year that an export import bank (Exim Bank) will be set to promote trade.

"We may use some of the reserves in the Exim Bank," Cabraal said.

The central bank is now sitting on 6.7 billion US dollars of foreign reserves which the central bank says is more than the targeted level.

A pegged central bank which collects foreign reserves larger than its domestic money supply has to spend large amounts of money as interest to sterilize the excess liquidity.

Now the rupee value of foreign reserves is twice the domestic monetary base of about 350 billion rupees.

Because earnings on foreign reserves are lower than the cost of domestic sterilization, high foreign reserve levels can create losses in the monetary authority.

According to the reckoning of Sri Lanka's central bank, which wants to have reserves of about 5.0 months of imports, the current reserve level of about 6.3 months of import is higher than optimum.

China transferred a part of its foreign reserves to a forex management agency by after issuing Treasury bills to its central bank. The forex management agency has put some of the money in China's Exim bank.

Sri Lanka's proposed exim bank which will mainly finance exporters and also contractors who may win deals from foreign governments, is to be set up next year, Cabraal said.