Sri Lanka’s declining gold reserves

15 Jan 2022

Sri Lanka’s declining gold reserves

15 Jan 2022

By Vinu Opanayake As of end December 2021, Sri Lanka’s gold reserves were $ 175.5 million, according to the Weekly Economic Indicator report released by the Central Bank of Sri Lanka (CBSL) last Thursday (13), while foreign currency reserves were at $ 2.7 billion (including the Yuan 10 billion Chinese swap). As per the data compiled by the CBSL, a year ago, gold reserves were at $ 408.9 million. According to Britannica, a gold reserve, a fund of gold bullion or coin held by a government or bank, is distinguished from a private hoard of gold held by an individual or non-financial institution. In the past, reserves were accumulated by rulers and governments primarily to meet the costs of waging war, and in most eras, governmental policy greatly emphasised the acquiring and holding of “treasure.” Banks accumulated gold reserves to redeem their promises to pay their depositors in gold. According to Nikkei Asia, gold is not directly linked to any nation’s economy and can withstand global unrest in financial markets, National Bank of Poland President Adam Glapinski was quoted by local media as saying in September last year. Samagi Jana Balawegaya (SJB) MP Dr. Harsha de Silva openly questioned the CBSL via a Twitter post recently as to whether the current gold reserves would be sold in part or full. He further added in his comments the data on gold reserves as at 5 January 2022, on which the gold reserves were at $ 384.1 million, and had dropped down to $ 382.2 million. Central Bank’s stance In response to this, the CBSL, issuing a statement, noted that the attention of the Central Bank had been drawn to several misleading and “erroneous” interpretations regarding the change in the composition of the bank’s international reserve position as at end of December 2021. Accordingly, the CBSL clarified that the changes in the composition of official reserves were in accordance with the current reserve management needs and priorities, considering all aspects of the reserve management requirements. It added that in fact, the Central Bank’s gold holdings by the end of 2008 were only $ 92 million (3.6% of gross official reserves of $ 2.6 billion), but were gradually increased by the end of 2014 to $ 893 million (10.9% of gross official reserves of $ 8.2 billion). “Hence, it is evident that the share of gold holdings in the reserve may change from time to time, reflecting the needs of the Central Bank to buy, hold or liquidate its gold holdings in accordance with the prevailing reserve management priorities. In that background, while the Central Bank’s gold holdings by the end of 2021 may have decreased to $ 175 million (5.6% of gross official reserves of $ 3.1 billion) based on the need to enhance the liquidity of the reserve portfolio, the Central Bank may, at a future date, consider increasing its gold holdings when the foreign reserve levels grow to values that may warrant a change in the composition of the reserve portfolio,” the statement added. What does selling gold reserves indicate? But what does the selling of the country’s gold reserves indicate? The Sunday Morning spoke to economists to determine the reason and the impact on the economy. University of Colombo Professor in Economics Sirimal Abeyratne told The Sunday Morning that part of the foreign assets of the country was held in gold and selling it showed the weakness of the country. University of Colombo Faculty of Arts Department of Economics Senior Lecturer Grade II Dr. Shanuka Senarath, speaking to The Sunday Morning, stated that the decline in the reserves was driven mainly by the prevailing pandemic as it had now aggravated the already existing economic issues. He added that Sri Lanka was getting fewer tourists while foreign remittances were also dropping, resulting in the country facing a foreign currency issue. “Gold reserves are normally kept in countries. For example, the US has the biggest gold reserves. Every country has its gold reserves and these gold reserves are kept in modern days for urgent matters while the purpose in the early days was much different. In the early days, money was printed based on the gold reserves the country had. By now, the gold reserves of a country are for urgent requirements and a country keeps the reserves in its respective central bank just to make sure the economy is in a decent position. Gold reserves are sort of an illusion,” Senarath noted. According to him, Sri Lanka has now sold most of its gold reserves as it does not have dollars. Speaking further on this matter, he stated that one way of getting dollars was by selling the gold reserves of the country as gold was a commodity that could be sold in any international market. He stated that an independent central bank did not need to seek permission from the Parliament or from the Cabinet of ministers to sell its gold reserves and had its own monetary policies. However, in terms of Sri Lanka, the Central Bank is not independent as the Governor of the Central Bank is appointed by the President. He stated that the Central Bank may not have to obtain permission from the Government to sell its gold reserves as it would invariably be the call of the Government in most instances. “We cannot import much when we have fewer foreign reserves. Whether we like it or not, the Sri Lankan Rupee is a local currency and it is not accepted in any part of the world. It is not accepted in the Maldives and it is not accepted in India. Once you go anywhere else in the world with a rupee note, it becomes a mere paper as the harsh truth is that our currency is not accepted anywhere,” Senarath elaborated. People now say that they can give their Sri Lankan currency and purchase dollars but that can be only done in Sri Lanka, he noted. Speaking further on this matter, he stated that the dollar and rupee were not interchangeable and if Sri Lanka was running out of dollars there was no other way for the country to earn it unless through foreign worker remittances, exports, tourism, or selling or leasing local assets to foreign investors. “Dollar reserves going down indicates that Sri Lanka will not be able to import fuel as fuel should be paid in US Dollars. We will not be able to import medicine as well as it too should be paid in US Dollars. Sometimes, it does not necessarily have to be in US Dollars but some other internationally-accepted currency,” he said. Coming back to gold reserves, he stated that theoretically there was no use in having gold reserves as we in Sri Lanka do not make transactions in gold but keep it to portray the financial strength of the country. “The problem is that we have sold some of the gold reserves we have. Now this gives an indication to the outside that we are running out of possible foreign reserves tools and we are selling our last resort. This dilutes the business confidence we have. Foreigners will think twice before investing in Sri Lanka. Lenders will be hesitant to lend to our country,” he added. Speaking further, he noted that if all the gold reserves were sold, the last resort would also be over, which would leave us with no other options to mitigate the foreign reserve crisis. How can Sri Lanka address this issue? Senarath stated that at the moment what Sri Lanka could do was not spend unnecessarily in the domestic market. One might say that there is no relationship between local expenditure and the country’s official foreign exchange reserves as the Sri Lankan Rupee cannot be exchanged with the US Dollar and therefore the Government can afford to spend in the local market, but spending in the local market indicates that the Government does not have sufficient income sources, thereby having to print money to pay for local expenditure, Senarath noted. “For example, if they are building jogging tracks, which is unnecessary spending at the moment, printing money means that money circulation in the country is going up. Now given that what we produce in the country remains constant or declining, the amount of money you need to borrow is going up, aggregate demand is going up because the money supply is going up. As a result of all these changes, prices too will go up. Nobody can challenge or stop this. If the product is constant or declining but the money printing is higher than that, there will be inflation. This would mean the exchange rate is depreciating,” he stated. One thing the Government could do to address these issues, according to Senrath, is spending only on essentials in the local market and shrink the economy. Secondly, highlighting the importance of attracting sufficient investments into the country, Senarath stated that the Government had to ensure both the locals and foreigners were confident in the local economy. He pointed at the lack of stable policies by the Government and declining rule of law coupled with political volatility. “They gazette gazettes morning to afternoon and who will have confidence in the country?” he questioned. Interest rates are at a lower range at the moment and people should ideally invest at this time. However, the investment has been really low as people keep their money at home, Senarath noted. “In terms of foreign investors, unless you go to China and talk to someone and tag an investment, nobody would freely come to Sri Lanka and invest as nobody has the confidence in Sri Lanka,” he noted. He concluded by suggesting that Sri Lanka should go to the International Monetary Fund (IMF), World Bank, and Asian Development Bank and borrow at a lower interest rate and or lease/sell State properties as a last resort. He further suggested encouraging exports, tourism, and worker remittances. The Sunday Morning contacted the CBSL to determine how the declining gold reserves would impact the economy. We were told to refer to the statement issued last week, which we mentioned earlier in this piece. When The Sunday Morning contacted the Treasury for their views on the same question and also on whether the CBSL needed to seek the approval of the Government to sell its gold reserves, an official claimed that as far as he knew, there was no special approval process required for that as the Central Bank could decide it on its own. However, for views on how declining gold reserves would affect the economy, he directed The Sunday Morning to contact the Central Bank or Treasury Secretary S. R. Attygalle; however, attempts to reach them for a comment proved futile

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Sri Lanka’s declining gold reserves

Sri Lanka’s declining gold reserves

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