CB continues to buy dollars despite pressure on rupee

The Central Bank has continued to purchase dollars from the domestic foreign exchange market for the second consecutive month in March, despite the recent pressure on the currency, as the Central Bank collects non-borrowed assets to shore up its foreign exchange reserves. 

According to provisional data, the Central Bank bought dollars worth of around US $ 50 million through March 23, which is referred to as ‘monthly net absorption’, after it bought US $ 23.42 million in February, even at the height of intense pressure against the rupee. 

Authorities at both the Central Bank and government are committed to the policy of rebuilding reserves through non-borrowed sources, as the country is recalibrating its budget financing policy towards domestic borrowings and is taking measures to woo non-debt creating foreign inflows via direct inflows and portfolio flows, albeit with limited success so far.

The dollar/rupee exchange rate is under pressure since around the second week of January on importer dollar demand, foreign debt settlements, still anaemic dollar earnings and exporters’ reluctance to convert dollars into rupees, expecting further depreciation of the currency. 

Some measures taken since late January to arrest the decline in the rupee against the dollar such as the mandatory conversion and sale of 50 percent of export proceeds to the Central Bank and the sale of 10 percent of inward worker remittances were temporarily suspended on March 17. 

However, banks are still barred from investing in Sri Lanka-issued sovereign bonds. 

Secretary to President and former Finance Ministry Secretary Dr. P.B. Jayasundera weighing in on the recent unwarranted volatility in the rupee confided that the rupee would regain strength from April, as they pin hopes on strengthening export earnings and other inflows and the current import substitution policy. The government last week decided to hire international consultants to promote Sri Lanka as a preferred destination for direct investments.

In what could be the biggest catalyst that will turnaround the country’s direct investment fortunes for the better, the government last week gazetted the Port City Economic Commission, offering the prospective investors an irresistible mix of incentives to set up shop in the 269 hectares reclaimed land off the busy Colombo Port.