Thread by @ChayuDamsinghe

Going to quickly explain what reserves are and how corruption can/cannot play into it.

#SriLankaEconomicCrisis #SriLanka #ProtestLK #EconomicCrisisLK
(1/9)

Think of reserves as a "portfolio of assets" owned by the Central Bank. It'll have cash, some bonds, some gold, some other assets with the IMF, etc.

Often denominated in USD or another global currency. Ours is USD.

(2/9)

So reserves are used for 3 broad purposes.
1. To bridge any dollar income/expenses gap the country has - release money from reserves
2. To intervene in foreign exchange market to affect the currency
3. To show confidence internationally that the country has backup money

(3/9)

1 can happen annually, but also on a day to day basis, if we need dollars to import something but we don't have inflows.

2 we're not really doing anymore after the float

3 we don't have reserves to show confidence, so the opposite is true

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It's very difficult to "steal" from reserves, since most of this money is not just cash lying around, but in different central banks, accounts, bonds, etc around the world. We convert and use as needed. There's also a good record of it.

(5/9)

But corruption can happen in 2 broad ways.

1 - remember how its used to bridge the negative income/exp dollar balance? If the balance is negative due to a corrupt project, then reserves will be used to balance against that "loss"

So then, the issue is not theft.

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2 - the reserves can be invested in a shady asset. Instead of say, safe US gov bonds if they get invested in say, a Greek government bond, then there's a loss there if that bond gets affected.

Not theft, but bad decision making.

(7/9)

So that is why sending money into reserves isn't necessarily "money going to Rajapaksas". They don't have access to it except through the Governor.

What can happen is bad projects that require use up of dollars.

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Right now, most dollars we get will be used for imports. I understand there's a trust issue, but from an econ standpoint, it's difficult to "steal" it now. Dollars can give us food, meds, fuel.

So please do consider it, at least as a remittance. We really need it.

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