ECONOMYNEXT – Sri Lanka’s foreign reserves dropped 372 million US dollars to 1.9 billion US dollars as money continued to be printed to keep rates down amid a large budget deficit and looming debt repayments.

Sri Lanka is following flexible inflation targeting a non-rule bound non-regime that has triggered repeated currency crises over the last 7-years including during an International Monetary Fund program.

During the last IMF program a ‘monetary policy consultation clause’ was easily circumvented to trigger a currency crisis in 2018.

Sri Lanka has printed large volumes of money from 2020 under Modern Monetary Theory, or post-Keynesian ‘alternative theory’ triggering the worst currency crisis in history and bringing the country to the brink of default.

Foreign reserves at 1.9 billion US dollars are about 1 months of reserves. Of this about 1.6 billion US dollars is from a Chinese swap.

A central bank without reserves has to float the currency and suspend convertibility.

In March an attempt was made to float but the 372 million US dollar reserve loss shows that a weak side convertibility in a peg was used. There is also a strong side convertibility undertaking in the form of a surrender requirement. (Colombo/Apr07/2022)