Sri Lanka is planning to resume a deal with the International Monetary Fund which can boost the island's forex reserves which had fallen to 5.7 billion US dollars and there is no capital flight, the Central Bank said.
There has been a net inflow of 216 million US dollars into government securities from foreign investors from February 09 when the rupee was partially floated, and corrective steps were taken to reign in credit growth which put pressure on a dollar peg, the Central Bank said.
According to Central Bank data foreign investors held 212 billion rupees of bonds up from 199 billion rupees on January 04. Treasury bills holdings rose to 84.5 billion rupees from 70.1 billion rupees in the same period there amid periodic changes.The International Monetary Fund held back the last 800 million dollar tranche under a stand by arrangement reached in May 2009, at the end of the island's previous balance of payment crisis.
"Meanwhile, the IMF-SBA (stand by arrangement) programme is progressing with plans of completing the 7th review towards the end of March 2012," the Central Bank said in a statement.
The IMF suspended its disbursements in mid 2011 asking the Central Bank to loosen a peg with the US dollar which underlying monetary policy no longer supported.
The resumption of the program could infuse two 400 million dollar tranches into the Central Bank's forex reserves which was now down to 5.7 billion US dollars. Reserves peaked at 8.1 billion US dollars in July just as credit growth picked up.
The Central Bank said foreign direct investments are projected to top a billion US dollars in 2012, which can boost reserves.
However FDIs are usually spent, resulting in imports. To increase foreign reserves absolutely, the monetary authority has reign in credit growth and start mopping up rupees from the banking system and contract central bank credit.
Sri Lanka's rupee peg came under pressure due to high credit growth including from loans taken by state enterprises to run large losses from mid 2011.
But from September, Central Bank credit started to ratchet up as it offset (sterilize) the contractionary effect of forex market interventions with expansionary rupee injections into money markets.
A clean float can break a cycle of sterilized intervention end central bank credit expansion.
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• IMF Appoints Sharmini Coorey, a Sri Lankan, to Head the New Department Formed for Capacity Building of Member States. Ms Coorey Currently Functions as the Director of IMF Institute
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