Foreign Asset Decreases

The latest numbers which showed that by October 15 the central bank had lost a further 150 million dollars in foreign reserves, either in peg defence or reserve appropriations.
Unlike in the past, Sri Lanka is now vulnerable because the government is exposed to foreign short term debt, with government rupee securities being sold to foreign buyers since 2006.
Dealers say foreign bill and bond buyers have been pulling out money in the wake of the international turmoil as predicted by independent analysts earlier.
Over the past four weeks, the Treasury bill stock held by foreign players had fallen to about 14 billion rupees from about 17 billion and the bond portfolio to 48.5 billion from about 53 billion, debt market players say.
By holding the peg, the central bank effectively underwrites the foreign currency risks of speculative bond buyers at the expense of the national economy and by injecting fresh liquidity the monetary authority also 'accommodates' resource outflows.
The current bout of 'sterilized intervention' can undermine the central bank's own program of controlling inflation.
Analysts have warned that maintaining a peg and targeting reserve money at the same time was incompatible, and would either lead to a currency crisis as now or unnecessarily high inflation and excess foreign reserve accumulation at other times when net flows were positive.
Sri Lanka's central bank has a weak record of monetary management.
Analysts say its level of competence in managing price stability is amply indicated by the country's inflation index, which has topped 20 percent in the past two years.
Sri Lanka has experienced high inflation and its currency has been in free fall for much of the existence of the central bank since it was created in 1950 by abolishing a currency board that had kept the country stable and inflation low under colonial rule.
There have been growing calls to abolish the central bank or bring in legislated inflation targeting to protect the poor and the national economy. -->