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Reading: Demand for and Adequacy of International Reserves in Sri Lanka

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Demand for and Adequacy of International Reserves in Sri Lanka

Authors:

Dimuthu Samaratunga ,

LK
About Dimuthu

Mrs. Dimuthu Samaratunga is a Deputy Director of the Economic Research Department of the Central Bank of Sri Lanka. She received a B.Sc. Honours Degree in Statistics and an MBA from the University of Colombo, and an M.Sc. in Economics and Finance from the University of Warwick, UK. Her research interests are mainly in the areas of International Finance, Financial Market Analysis and Macroeconomic Management.

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Anil Perera

LK
About Anil

Mr. Anil Perera is an Economist attached to the Economic Research Department of Central Bank of Sri Lanka. He received a BA Special Degree in Economics with First Class Honours from the University of Sri Jayewardenepura, Sri Lanka and Master of Social Sciences Degree in Economics from the University of Kelaniya, Sri Lanka. Currently, he is reading for a doctoral degree at Monash University, Australia. His research interests are in the fields of Monetary Policy, Financial Markets and Macroeconomic Management.

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Abstract

During the last few decades, especially emerging economies have opted to accumulate large stocks of international reserves to withstand unexpected external turbulences and also to reinforce external sector performances through maintaining exchange rate stability. Substantial reserve accumulation entails several benefits as well as direct and indirect costs. Particularly, holding excess reserves for a long time could generate welfare losses which is an important policy consideration. In this context, the key objectives of our study are twofold: first to develop a reserve demand model based on historical data; and second, to assess the reserve adequacy for Sri Lanka based on conventional and recent methodological innovations in the reserve adequacy literature. Based on data for the period 1996 – 2012, we observe that international reserves in Sri Lanka are broadly determined by import propensity, trade openness, short-term debt and liabilities and money supply. In terms of key conventional measures of reserve adequacy, we find that Sri Lanka has held adequate reserves, despite some variations in some years. At the same time, based on the new risk-weighted reserve adequacy metrics proposed by the International Monetary Fund, we observe that Sri Lanka has had adequate levels of reserves except in the years 2000, 2008 and 2011 This new metrics appears to be a better standard to measure reserve adequacy than the conventional bench-marks from a precautionary perspective. Our results have important policy implications for exchange rate, reserve accumulation and the monetary policy of the Central Bank of Sri Lanka.

Staff Studies Vol.42(1&2) 2012; 1-45

How to Cite: Samaratunga, D. & Perera, A., (2015). Demand for and Adequacy of International Reserves in Sri Lanka. Staff Studies. 42(1), pp.1–45. DOI: http://doi.org/10.4038/ss.v42i1.4686
Published on 18 Sep 2015.
Peer Reviewed

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