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Central Bank sells family gold to battle foreign exchange crisis

The Central Bank has partly sold the country’s gold reserves as it battles the ongoing foreign exchange crisis to boost liquid reserves.

Central Bank Governor, Ajith Nivard Cabraal revealed that the bank had sold about 3.6 tonnes of gold out of a 6.69 tonne stockpile it had at the beginning of 2021, leaving it with around 3.0 to 3.1 tonnes of gold..

Sri Lanka’s gross foreign reserves had dropped to US$ 1.5 billion in November 2021 but recovered in December to touch US$ 3.1 billion. And yet the demand on the dollar remains high in an import dependent economy.

“When reserves reduce Central Bank reduces the gold holding,” Cabraal said adding that they bought gold when foreign reserves were going up.

“Once the reserve levels increase over 5 billion US dollars CB will consider increasing the gold holdings”, he claimed.

Sri Lanka’s gross foreign reserves picked up to US$ 3.13 billion in December 2021, after dropping to $ 1.58 billion in November, though reserves are down from 5.66 billion dollars at end of 2020.

CBSL data shows that on 31 December 2019, there was $ 954.88 million worth of gold reserves held by Sri Lanka.

By 29 May 2020, gold reserves had plummeted to $ 372.7 million, a reduction of $ 582 million in a span of six months after President Gotabaya Rajapaksa elected to power in November 2019.

After 19 months of selling gold during his rule Sri Lanka Central bank has sold over half of its gold reserve for the second time.

The Central Bank that targets an exchange rate has failed to  control short term interest rates by printing money (inflationary policy), when economic activity (private credit in particular) recovers without selling a similar equivalent in dollars.

Sri Lanka started the current bout of inflationary policy around August 2019 re-purchasing bonds from the market (re-monetizing past deficits) when foreign reserves were $ 8.5 billion.

Main Opposition SJB Parliamentarian and eminent economic expert Dr. Harsha de Silva tweeted saying CBSL has sold more than half of the country’s gold reserves, bringing it to $ 175.4 million at present from $ 382 million in mid-November. 

Citing latest CBSL data, the MP also said that there was no mention of whether the CNY 10 billion (accounted as equivalent to$ 1.5 billion) can be used for debt repayment. 

“This plane is crashing. The only question now is are we going to try and soft-land it on the beach and save the passengers or are we going to let it come down hard nose first and hit rock?” claimed the SJB MP via his tweet

Sri Lanka started to buy gold aggressively when Governor Cabraal was running the Central Bank in a previous term.

In 2009, Sri Lanka bought 15.8 tonnes of gold from the International Monetary Fund.

 After selling in 2010 and 2011, Cabraal bought 3.6 tonnes of gold in 2012 and 9.3 tonnes in 2014 as reserves recovered amid deflationary policy (sterilized purchases of forex).

However from 2014 September Sri Lanka’s monetary policy deteriorated with large liquidity injections made to target a call money rate, despite operating a peg and sharply less rule based policy being followed under ‘flexible’ inflation targeting and ‘flexible’ exchange rate.

Sri Lanka sold gold in 2015, 2018 and 2019 but did not buy any back stock as reserves fell in line with liquidity injections.

Meanwhile the visit of the Chinese Foreign Minister Wang Yi to Sri Lanka from January 8 to 9, and the Indian Foreign Minister S.Jaishankar’s recent phone call to his Lankan counterpart G.L.Peiris, have given the impression that both Asian economic giants are keen on helping Sri Lanka come out of the economic crisis it has been in in the past year.

Due to several factors, including backfiring government’s arrogant non-scientific poices ,Covid-19 and gross mismanagement, Sri Lanka is now frightfully short of dollars even to import essentials. 

The disastrous decision to shift wholesale to organic farming immediately, has led to predictions of a food shortage in April 2022. Government’s callousness has led to an unprecedented rise in prices of essentials.

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