Sri Lanka sells monetary gold as foreign exchange reserves decline

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ECONOMYNEXT – Sri Lanka liquidated part of its gold holdings in December 2020 to increase liquid foreign assets in line with declining annual foreign exchange reserves, Central Bank Governor Nivard Cabraal said even as reserves of year-end were increased with a China swap.

The central bank is estimated to have sold around 3.6 tonnes out of a 6.69 tonnes (around 215,000 troy ounces) gold stock it had at the start of 2021, leaving it around 3.0 to 3. , 1 tons of gold.

Also in 2020, the central bank also sold 12.3 tonnes of gold after starting the year with 19.6 tonnes of gold.

Gold sales were to increase liquid reserves, Governor Cabraal said.

“When the reserves go down, we reduce the holding of gold,” Cabraal said. “We bought gold when the foreign exchange reserves were increasing.

“Once reserve levels increase by over US $ 5 billion, CBSL will consider increasing gold holdings.

Sri Lanka’s gross foreign exchange reserves reached US $ 3,137 million in December, after falling to US $ 1,588 million in November, although reserves were down from $ 5,665 million at the end of 2020.

This is the fourth consecutive year that Sri Lanka has sold gold.

Sri Lanka began aggressively buying gold when Governor Cabraal headed the agency in a previous term.

In 2009, Sri Lanka bought 15.8 tonnes of gold from the International Monetary Fund. After having sold in 2010 and 2011, Cabraal bought 3.6 tons of gold in 2012 and 9.3 tons in 2014, the reserves being reconstituted within the framework of a deflationary policy (purchases of sterilized currencies).

However, from September 2014, Sri Lanka’s monetary policy deteriorated with large injections of liquidity to target a call rate, despite the application of an anchoring policy and much less based on rules under “flexible” inflation targeting and a “flexible” exchange rate.

Sri Lanka sold gold in 2015, 2018 and 2019, but did not repurchase any, as reserves declined in line with cash injections.

Nor can a central bank that targets an exchange rate control short-term interest rates by printing money (inflationary policy), when economic activity (especially private credit) picks up without selling a similar equivalent. in dollars.

Sri Lanka initiated the current inflationary policy around August 2019 by buying back bonds in the market (remonetization of past deficits) when foreign exchange reserves stood at US $ 8.5 billion.

Such soft-pegs hang out at the International Monetary Fund until laws ending discretionary injections are passed or there is a shift to a clean float regime.

Gold was the anchor of monetary policy until liquidity injected to stimulate employment by the Federal Reserve caused the collapse of the Bretton Woods system, as confidence in the dollar anchor US gold was declining and interventions were sterilized to keep rates low.

In 1969, US President Richard Nixon, backed by Keynesians, sacked longtime Fed chief William McChesney Martin to prevent him from raising rates.

He was succeeded by Arthur Burns who ended the remnants of a 300 year old gold standard, created a commodity bubble known as the “first oil shock” and killed the Bretton Woods system.

In 1970, the United States sold 699 tonnes of gold and an additional 769 tonnes the following year to ensure convertibility and mop up dollars.

In October 1971, however, Nixon suspended convertibility and floated the US dollar, blowing up the Bretton Woods system of soft-pegs.

An additional 486 tons were sold in 1972 as part of a short-lived deal called the Smithsonian Agreement, ending the gold standard forever and giving monetary authorities almost unlimited freedom to inflate money supply and prices to will. (Colombo / Dec08 / 2021)

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