Rupee to Gently Appreciation, Reserves to Top $10bn - CB Governor Cabraal

04th January 2011, www.island.lk

Central Bank Governor Ajith Nivard Cabraal said the rupee would gently appreciate this year. With foreign currency inflows expected to pick up this year, he said the rupee would tend to appreciate but the rupee/dollar exchange rate would be kept stable with the Central Bank absorbing large inflows to prevent a sudden appreciation. In 2010, the rupee gained 3.1 percent against the greenback.

"We would allow the trend to continue (the appreciation of the rupee against the dollar) but we would ensure there is exchange rate stability because this is important," Cabraal said presenting the ‘Road Map: Monetary and Financial Sector Policies for 2011 and Beyond’ at the Central Bank auditorium yesterday (4).

"There will be a gentle appreciation of the rupee this year (2011)," he said. Cabraal said the Treasury room of the Central Bank was gearing to the eventuality of official foreign currency reserves reaching US$ 10 billion, which he said would be soon. At present reserves are near US$ 6.6 billion, enough to finance exports for 6.1 months.

According to Central Bank estimates, export earnings grew 13.3 percent in 2010, earnings from tourism increased 61.4 percent to US$ 501 million, worker remittances increased 24 percent to US$ 4.1 billion and are expected to continue to grow in 2011.

Dealers told The Island Financial Review that the rupee could appreciate to Rs. 109.50 against the dollar after appreciating near 3 percent beginning the year at 114.35 and closing 2010 at 110.94/65.

The Balance of Payments surplus is estimated at US$ 900 million in 2010 and US$ 350 million in 2011.

Although FDIs have performed below expectation, at US$ 500 million in 2010, Cabraal said conscious efforts to improve the country’s sovereign ratings and business climate would attract more investments, along with exchange control relaxations.

Improving investor confidence was vital and Cabraal said the downward sloping yield curve of Sri Lanka Sovereign Bonds was testament to having moved in the right direction.

A US$ 500 million bond issue in 2007 had a yield of 8.25 percent. In 2009 an issue for the same amount yielded 7.4 percent. The latest sovereign bond issue of US$ 1 billion last year attracted investors with a yield of 6.25 percent. This ten year bond was 6 times oversubscribed.

"Strong macroeconomic fundamentals, the end of a 30 year conflict and the ongoing successful performance under the IMF standby facility arrangement contributed to improved investor sentiment," Cabraal said.

Image: The Central Bank’s Road Map on Monetary and Financial Sector Policies for 2011 was unveiled at the John Exter Auditorium yesterday. Central Bank Governor Ajith Nivard Cabraal addressing top public officials and private sector executives. Picture by Sumanachandra Ariyawansa. (Courtesy www.dailynews.lk).

Sri Lanka's Gross Official Reserves Pass $7bn - Central Bank

07th October 2010, www.lankabusinessonline.com

Sri Lanka's gross official reserves surpassed the seven billion US dollars level on October 04, the central bank said in a statement.

The level of reserves is equivalent to over 6.8 months of imports and is the highest ever reserves level of Sri Lanka, it said.

On October 05 excess liquidity shot up to 64 billion rupees indicating an influx of foreign money with 42 billion rupees parked in the central bank's repo window.

In September a billion dollar 10-year sovereign bond issued by Sri Lanka was oversubscribed 6.3 times.

Also in September the International Monetary Fund released 212.5 million US dollars to Sri Lanka under its 2.5 billion US dollar program.

Sri Lanka Gold Reserves now $700mn

26th July 2010, www.dailynews.lk, Jayasiri Munasinghe

The Central Bank has been able to amass record gold reserves with the Central Bank taking steps within the past 10 months to purchase 21 metric tons of Gold - an increase from the paltry two to three tons of gold in its vaults not so long ago.

This is an unprecedented feat and a great victory according to Senior Deputy Governor of the Central Bank Dharma Dheerasinghe.

He said the value of the gold reserves currently held by the Central Bank is 700 million US dollars (Rs. 75 billion).

The Senior Deputy Governor said there was a trend showing an escalation of gold prices in the world market on a daily basis. At such a time the success of the Central Bank in raising its gold deposits was an indication of the country’s economic strength.

He also said that the Central Bank which has been successful in accumulating such a large gold reserve will at no time barter it away in a way that would be disadvantageous or unprofitable to the country.

While succeeding in expanding its gold reserve base the Central Bank has also been able to earn Rs 10 billion from its overseas investments - a special feature being that what the CB had earned from its overseas investments for the whole of last year was equalled in January alone this year. He said they expect to earn over Rs. 20 billion from overseas investments by the end of this year. The Senior Deputy Governor said by enhancing the country’s foreign reserves in this manner they have been able to cover up six months of imports.

“Two or three years ago our foreign reserves were so low we were able to meet only about two weeks of imports.Being able to rescue the country from such a situation is indeed a great victory,” he added.

Sri Lanka Exports Up in February Helped by Agricultural and Industrial Exports

11th May 2010, www.dailynews.lk

Sri Lanka’s external sector performance showed signs of improvement along with the gradual recovery of the global economy. Earnings from exports grew by 20.0 percent in February 2010 to US $ 629 million led by higher earnings from agricultural and industrial exports, the Central Bank said yesterday.

The expenditure on imports also increased by 60.6 percent to US $ 973 million, due to the increased demand for imports within all the sub sectors.

Accordingly, the trade deficit expanded to US $ 344 million in February 2010.

Earnings from agricultural exports, which accounted for 27.0 percent of total exports, increased in February 2010, year-on-year, led by tea, rubber and minor agricultural exports.

Tea and rubber, whose export volumes increased by 20.1 percent and 44.1 percent, respectively, continued to fetch higher prices in the international market. Tea prices increased by 25.7 percent to US dollars 4.35 per kg mainly due to the finer quality of Ceylon tea exports and the supply shortages in the international market.

Rubber prices increased to US $ 2.86 per kg, reflecting a 95.4 percent increase compared to February 2009, mainly due to the recovery in international demand. Supply shortages due to the adverse weather conditions that prevailed in the major rubber producing countries in Asia also helped increase the international rubber prices.

Earnings from minor agricultural exports increased due to higher prices fetched by fruits, coffee, and cocoa products and increased volumes of vegetables, arecanuts, cashew and essential oils.

Export earnings from certain spices, such as cinnamon and cloves, increased led by higher volumes and prices.

The industrial exports, which were affected by the global economic crisis, rebounded in February 2010, led by the exports of processed food and beverages as well as rubber products.

Although exports of textile and garments and ceramic products declined in February 2010, year-on-year, they reflect an improvement since January 2010.

All major categories of imports increased in February 2010.

Expenditure on imports of consumer goods increased significantly, with notable increases in food imports such as rice, sugar and wheat.

Expenditure on imports of non-food consumer durables also increased significantly in February 2010. Amongst intermediate goods, expenditure on petroleum imports increased substantially in February, year-on-year, as the average import price of crude oil rose by 71.4 percent to US $ 78.23 per barrel. Import expenditure on fertilizer increased in February 2010, compared with the same period in 2009, mainly due to the substantially higher import volumes.

Imports of investment goods also increased in February 2010 led by higher expenditure on transport equipment, building materials and machinery and equipment, which augurs well for future economic activity. During the first two months of 2010, foreign remittances increased by 13.0 percent over the corresponding period of 2009 to US $ 564 million.

The gross official reserves, with and without Asian Clearing Union (ACU) funds, were at US $ 5,408 million and US $ 5,032 million, respectively, by end of February 2010. Based on the previous 12 months average imports of US $ 921 million per month, the gross official reserves, without ACU funds, were equivalent to 5.5 months of imports.

Gold an Important Anchor for Sri Lanka Foreign Reserves: CB Governor. A Historical Outlook of the Role Played by Gold and Paper Money in the Economy

14th November 2009, www.lankabusinessonline.com

Sri Lanka's central bank, which maintains a soft peg with the US dollar, said gold would be an 'important anchor' for its foreign reserves, which have zoomed in 2009 with large foreign inflows.

Gold has hit new highs in recent weeks, with the US dollar again weakening under extended loose monetary policy, reversing gains made in late 2008.

"In very volatile circumstance across the world you need to have intrinsic value created in your portfolio," Central Bank Governor Nivard Cabraal said.

"In reserve management you have different types of instruments, as well as different types of reserve currencies and reserve positions which will give you a certain balance.

"We took a decision about seven months ago that we would increase our gold portfolio as well."

Gold Reserves

Over thousands of years gold has been selected by markets as a preferred medium of exchange and a store of value, which gave stability to economies and protected the property rights of the people by preventing appropriation by the state through inflation.

Unlike limitlessly inflationary paper fiat paper money, it is not possible to increase the supply of gold as and when a government wishes and generate 'inflation' as gold has 'intrinsic value' and is relatively rare and 'costly' to produce.

When the first central banks started appearing in Europe, they were required to exchange paper money for gold on demand. Excessive printing of paper would cause the 'price' of paper would 'fall' and that of gold to 'rise'.

The high price of gold would trigger demands for gold returns under a convertibility undertaking, preventing further printing and a hike in interest rates. The metal therefore acted as a 'domestic monetary anchor' against inflation.

Because the same anchor was used in all countries, exchange rates tended to be fixed, unless money printing forced a 'devaluation' against gold.

From 1834 to the creation of the Federal Reserve in 1913, gold was 20.67 US dollars an ounce, up from 19.75 dollars an ounce in the previous century and there was no sustained 'inflation'.

The Bank of England lifted gold convertibility as money was printed during the First World War. The sterling started to 'float' against the gold and the US dollar.

After a failed return to the gold standard in the 1920s, (when the sterling continued to float against the US dollar and gold) which Alan Greenspan later said led to the Fed to triggering the Great Depression, Britain lifted convertibility again in 1931.

The US devalued its currency to 35 dollars an ounce during the Great Depression under President Roosevelt's so called New Deal. The Bretton Woods system was also created under a 35-dollars-an-ounce standard after World War II.

Rise of Paper Money

Under the Bretton Woods system the importance of gold as a reserve asset diminished.

Mercantilist economists launched calculated assaults on the psyche of the people to convince them that the use of gold as money was not useful and that high inflation came from sources other than paper money.

Proponents of welfare states made powered by paper money supply expansion, also labeled people who insisted on the virtues of gold as 'gold bugs'.

Under Bretton Woods, non-US central banks were expected to peg to the US dollar as an 'external monetary anchor'.

Dollar notes were expected to be 'as good as gold' with the US by then having most of the world's monetary gold. But continued loose US policy drove the gold price up relentlessly. Essentially the US dollar had also by then also started to 'float' against gold.

Desperate central banks then created their own internal gold market at 35 dollars an ounce and tried to pretend that the rest of the world did not exist. A gold pool was created in London to try to even up prices.

Following the Vietnam War, excessive Fed printing created the first oil shock and drove free market gold price up further, leading to massive US reserve losses by 1971.

In August 1971 President Nixon closed the gold window and imposed trade and price controls amid the first oil shock.

The dollar was then re-pegged at 38 dollars in December. After a final failed peg at 44 US dollars and the last vestiges of Bretton Woods was finally abandoned in 1973. Oil rose to new highs.

Developed nations went to floating fiat paper currencies while developing nations continued to struggle with unstable Bretton Woods style pegs of various kinds while a few like Singapore and Hong Kong returned to hard pegs or 'currency boards'.

The major reserve assets of floating central banks became government Treasury bills. Deliberately flawed price indices became 'domestic monetary anchors' instead of gold.

Peak Gold

Following the Great Inflation of 1970s, gold peaked at around 800 dollars an ounce during the 'second oil shock of 1980. During that year Sri Lanka saw the highest inflation in its history until the 2008 bubble.

US Fed chief Paul Volcker then went into strict monetary targeting and bought inflation and the gold price down below 300 dollars an ounce in the 1980s.

In 2001, when the Fed went on its ill-fated series of rate cuts to head off 'deflation' gold was only 270 dollars an ounce. Oil was about 20 dollars a barrel.

When the commodity bubble peaked in 2008 gold hit 1,000 US dollars in March. As the US went into debt deflation, and the dollar strengthened, gold fell to around 850 US units.

Amid continued loose monetary policy the US dollar is now floating weaker against gold and has topped 1,100 US dollars, against just 20 dollars when the Fed was created in 1913.

According to the World Gold Council, the US still had 8,133 tonnes of gold. Sri Lanka had 5.3 tonnes by September, Bangladesh 3.5 tonnes and India 357 tonnes.

Sri Lanka had started to increase its gold reserve assets over several months as foreign inflows increased and reserves rose dramatically from around a billion US dollars in March to nearly five billion by October.

Golden Aims

"We took a decision about seven months ago that we would increase our gold portfolio as well," says Cabraal.

"And I think it was the right decision because a) it ensures that your exposure to volatile currencies is reduced, b) it has intrinsic value and c) it gives you a kind of stature overall that you are moving to a reserve management that takes into consideration different types of commodities as well as currencies.

"All those have been achieved."

Sri Lanka's and India's gold purchases came as the International Monetary Fund is selling down its stock. According the World Gold Council, an industry body that promotes the use of gold, the IMF had 3,200 tonnes in September. IMF is selling gold to raise revenue. Reserve Bank of India bought 200 tonnes.

Lanka has a peg to the US dollar. For a pegged country however, putting cash in non-pegged assets is a risk. During late 2008 Sri Lanka lost about 200 million US dollars by investing large portions of reserves in non-dollar assets.

The 1980s have shown that when the US is committed to tight monetary policy, such as in the 1980s, the price of gold can reverse dramatically versus gold in a setting where gold is demonetized.

But current fed chairman Ben Bernanke, dubbed 'helicopter Ben' for repeating Milton Friedman's remarks about the dropping dollar notes on the economy from the air, is not considered an inflation hawk.

The World Gold Council said it was "delighted" by Sri Lanka's move to increase gold assets.

"As the dollar continues to weaken and central bankers around the world realise the continuing importance of gold in providing economic stability…," chief executive Aram Shishmanian said in a statement.

"We believe more central banks in Asia and beyond will now announce increased allocations to gold."

Sri Lanka is not about to abandon its dollar peg to which it has clung loosely and with chronic high inflation and depreciation since a currency board with Sterling was abolished in 1950.

But like developed nations did in 1971, Sri Lanka's as well as India's decision to increase gold reserves spell growing unease about the holding US reserve assets and indirectly confidence in the dollar as an external anchor.

So far Sri Lanka's central bank is sitting pretty on its gold holdings.

"The way we have accumulated has been slow; it has not been spectacular purchase," says Cabraal.

"And I think what we have done is the right thing and today's prices reflect that.

"So we are happy about that and we see that over time it will be a very important anchor for our reserve."

Sri Lanka to Scale Back Rupee Intervention, Allow the Exchange Rate to Become More Market-Determined

12th November 2009, www.bloomberg.com, By Anusha Ondaatjie

Sri Lanka will scale back intervention in the rupee and allow the exchange rate to become more market-determined as investment picks up following the end of a 26-year civil war, a central bank official said.

The rupee traded within a range of 114.18 to 115.10 per dollar over the past two months as policy makers sought to cap gains in the currency. Sri Lank is seeking to support export growth in items such as tea and textiles and aid an economic recovery.

“Given the high inflows, we will continue to purchase the excess in the market,” K.D. Ranasinghe, head of the Central Bank of Sri Lanka’s economic research department, said in an interview today from Colombo. “But the rupee can go either way and will depend on market conditions here and overseas.”

Sri Lanka’s foreign-exchange reserves will surpass an unprecedented $5 billion once the nation receives the second part of a $2.6 billion loan from the International Monetary Fund, the central bank said Nov. 7. The holdings will increase further as investor confidence improves, it said. The bank said last month it purchased $2.5 billion from the market from the end of March 2009 through to Oct. 15.

The rupee traded at 114.46 per dollar as of 2:06 p.m. in Colombo, according to data compiled by Bloomberg. It is up 0.3 percent from the end of last week and set for its best weekly gain in two months.

”It’s good not to have authoritarian measures to artificially control the market,” said Romesh Gomez, head of treasury at Asia Capital Plc in Colombo. “Foreign investors in rupee bonds would like to see appreciation, and that is likely going to be the currency’s direction in the short-term. The central bank is still keeping safeguards for exports.”

‘Sensible Policy’

Sri Lanka’s $41 billion economy may expand as much as 6 percent next year after growth of about 3.5 percent in 2009, central bank Governor Nivard Cabraal said Oct. 6. The IMF raised its forecast for this year on Sept. 22, predicting gross domestic product will grow 3.5 percent compared with a July estimate of 3 percent.

Sri Lanka, which has been purchasing gold for the last seven months, will continue buying the metal as a hedge against volatility in currency markets, Cabraal said Nov. 6.

The central bank’s policy of adding to reserves by accumulating foreign flows and preventing a sharp appreciation of the currency “has been a sensible policy,” Koshy Mathai, the IMF’s resident representative for Sri Lanka, said Nov. 9.

In return for the IMF loan approved in July, Sri Lanka agreed to reduce its budget deficit to 5 percent of GDP by 2011, from 7 percent this year, and maintain flexibility in the exchange rate in order to build foreign reserves to cover 3 1/2 months of imports and bolster the economy.

The central bank’s Ranasinghe said this week’s faster appreciation of the rupee had no connection to the IMF agreement.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.

Sri Lanka's Gross Official Reserves Exceed 5 BN USD with the Second IMF Installment

07th November 2009, www.colombopage.com

Sri Lanka's Gross Official Reserves will exceed USD 5 billion with the receipt of the second installment of the IMF loan, the Central Bank said today.

The International Monetary Fund (IMF) on Friday approved the second trench of USD 329 million under its 20-month Stand-by Arrangement of USD 2.5 billion to Sri Lanka.

According to the Central Bank, currently the gross official international reserves (without ACU balances) of the country which stand over USD 4.8 billion will surpass USD 5 billion mark with the receipt of the USD 329 million.

With the renewed investor confidence on the Sri Lanka's economy and the continuation of the steady increase in foreign exchange inflows, the country's external reserves position is expected to strengthen further in the coming months, the Central Bank said.