CB continues to buy dollars from market despite forex crunch

The Central Bank has continued to remain a net purchaser of foreign currency from the domestic market in July in its pursuit to collect dollars from non-debt creating inflows to recoup part of its reserves, which shrunk the most during the month due to a billion dollar bond settlement. 

Accordingly, the Central Bank has purchased US$ 37.65 million from the domestic foreign exchange market in July, slightly up from US$ 33.71 million in June, amid the worst crunch in liquidity in the foreign exchange market which prompted the Central Bank to tighten monetary policy last week to partly address the anomalies.   The July purchases brought the cumulative foreign exchange purchases so far during this year to US$ 177.65 million. 

The Central Bank expects to collect a net US$ 650 million to US$ 700 million from these purchases and the ones made from the mandatory surrender as part of export earnings and remittances.  As remittances from those who work abroad has seen some easing during the last few months, authorities raised key interest rates last week to bridge part of that gap prevalent in the formal and informal channels. 

Further, a concerted effort is also being made since last week to ensure the broader economy is unhurt and the merchandise exports sector is insulated from the virus related lockdowns when the two other key sources of foreign exchange—tourism and direct inflows— have virtually stopped due to the conditions created by the virus.
Merchandise exports are recovering since a brief setback during April and May due to the initial restrictions imposed on mobility and other economic activities to stem the third wave of the virus spread.

While, stop-gap measures such as swap lines and other bilateral and multilateral inflows would bring the foreign exchange reserves up to US$ 4.0 billion by the year end from US$ 2.8 billion in July, Central Bank officials re-emphasised on the need to create sustainable foreign inflows from merchandise and service exports and direct investments to rebuild reserves on a long term basis to a level which can withstand shocks such as loss of certain foreign incomes in times like these. 

“Obviously the long-term measure is that Sri Lanka’s non-debt creating inflows will have to be increased,” said Dr. Chandranath Amarasekara, Director of Economic Research Department at the Central Bank. 

He also alluded to efforts made by the authorities to divest part of non-strategic assets to generate foreign inflows, which could buttress the reserves while minimising or cutting off their reliance on the government coffers. 

“So, those are the avenues through which the country can strengthen the economy by creating non-debt creating inflows. They have to happen”, Dr. Amarasekara emphasised.