In July 2023, Sri Lanka’s foreign reserve position exhibited a strengthening trend, reaching USD 3.8 billion, a notable YTD increase of 98.2% from USD 1.9 Bn in December 2022.
First Capital Research says that this upward momentum was underpinned by an easing of pressure on the BOP (surplus of USD 2 Bn in 1H-2023) supported by the substantial 34.8% YoY reduction in the trade deficit in 1H2023. Similarly, remittances and tourism receipts marked an impressive YoY growth rate of +75.3% and +28.8%, respectively which further bolstered the reserve position.
“However, a deceleration in the MoM growth of the reserve position was observed in July 2023 amidst the gradual relaxation of import restrictions initiated in May-23.”
Consequently, the month of May-23 recorded the first YoY increase in import expenditure since February-22, amounting to USD 1.5Bn while the trend persisted into the subsequent month. As the GoSL further lifted a ban on imports of heavy vehicles w.e.f Aug-23 for the first time since Mar-20, it further added pressure on the BOP and overall reserves.
“Although foreign inflows continue to infuse into the CSE and Government Securities markets throughout the year, these inflows have not yet attained a magnitude sufficient to counterbalance the impact of import relaxation constraints.”
In light of these dynamics, it would be prudent to closely monitor the implications of the gradual relaxation of import restrictions on the reserve position before considering any further adjustments to interest rates.
