• Foreign reserves bolster import capacity amid domestic shortages
• Despite higher accumulation costs, banks prioritise foreign currency reserves

Sri Lanka banks have maintained $ 3.7 billion with financial institutions abroad by the end of Q2 of 2024, which enabled them to meet foreign currency requirements despite shortages in the domestic market, Central Bank said.

According to the Financial Stability Review released last week, the banking sector maintained a considerable amount of foreign currency funds with financial institutions abroad for the prudential liquidity risk management.

It said that the banking sector significantly improved their balances with financial institutions abroad from 2021 to meet their liquidity needs in foreign currency, in an environment where a foreign exchange liquidity deficit was prevailing in the domestic forex market.

“This enabled banks to maintain their ability to meet FCY obligations and facilitate the importation of necessities,” the report said.

Therefore, at the end Q2 of 2024, the banking sector maintained a balance of $ 3.7 billion with financial institutions abroad with a growth of 8.7% year-on-year.

However, the Central Bank said that the higher accumulation of funds abroad may reduce the profitability of the banking sector due to tying up of funds that might otherwise be used for more profitable investments.

Nevertheless, it was observed that such balances declined over the past three quarters, mainly due to the decline in balances of domestic banks which are not domestic systemically important banks and foreign banks.

Domestic systemically important banks maintained the highest amount of balances with financial institutions abroad of $ 1.6 billion while foreign banks also possessed a significant amount of balances amounting to $ 1.5 billion, at the end Q2 of 2024.