Two leading state banks under pressure to sacrifice foreign reserves

Two leading state owned banks have been pressurized to swell the country’s foreign reserves, sacrificing 15 to 45 percent of its foreign currency assets, including deposits and inflows.

Despite Central Bank Governor Prof. W.D Lakshman talking on closely guarded negotiations with overseas agencies for foreign funding, People's Bank and Bank of Ceylon (BOC) have been directed to transfer 15 and 45 percent of their dollar reserves respectively to state coffers.

In addition, all commercial banks will have to transfer US dollar remittances being received by it from overseas customers to the treasury by giving them a high interest 3 percent more than  the current interest rate, official sources said.

Sri Lanka’s official reserves were USD 4.8 billion by the end of January 2021, down from USD 5.7 billion in December last year, the latest Central Bank data showed.

Without considering the reality and actual facts, the Central Bank Governor told a news conference that “negotiations are being going on with undisclosed overseas agencies to raise some of the required foreign exchange inflows."

Without revealing the identity of those foreign agencies, he said foreign funding of USD 5 billion will be raised through swaps, loans and other sorts of mechanisms.

"Negotiations are underway with overseas central banks, banks, and other agencies, multilateral agencies but IMF is not there in the list yet," he added.

He said required foreign exchange would be sourced from the market and gaps would be filled with swaps and loans. “This we have been doing several days over the last week,” he added.

“When there is excess foreign exchange liquidity in the market, there is a policy the Central Bank purposely follows," he said, adding that purchasing that foreign exchange liquidity to add into the CBSL official reserves.

Gross inflows to the government in 2020 dropped from USD 6.5 billion to little over USD 2 billion in 2020, the Central Bank said in its External Performance Report for last year.

Foreign investment in the government securities market recorded a marginal net outflow during the month.

A net outflow of foreign investment amounting to USD 10 million was recorded in the rupee denominated government securities market in December 2020, increasing the cumulative net outflow to USD 553 million during 2020.

The total outstanding exposure of foreign investment in the rupee denominated government securities market remained low at USD 37 million by end December 2020.

There were net outflows of USD 16 million from the secondary market of the CSE in December 2020. On a cumulative basis, the CSE recorded a net outflow of USD 225 million, from both primary and secondary markets during 2020.

Meanwhile, long-term loans to the government recorded a net outflow of USD 9 million in December 2020.