CB struggles increasingly to purchase dollars amid falling inflows

• Net purchases at US$ 3.57mn in May compared to US$ 62.81mn in April 
• Was forced to sell US$ 10mn in May as rupee came under pressure 

The Central Bank struggled to purchase dollars from the domestic foreign exchange market in May amid falling export earnings and other inflows largely due to disruptions to economic activities from ongoing virus related restrictions.

Net absorptions or net purchases of dollars fell to just US$ 3.57 million in May from US$ 62.81 million in April as the Central Bank attempts to re-build its foreign currency reserves out of non-borrowed sources. Central Bank in May purchased US$ 13.57 million from the foreign exchange market while it was forced to sell US$ 10.0 million as the rupee came under severe pressure, which plunged below Rs.200 against the dollar.  

The Central Bank bought US$ 75.31 million in March recording the highest monthly net absorptions since August 2020. There were no sales of dollars this year except in January when the rupee first came under severe pressure. 

Due to the impending crisis in the external sector and the economy from the persistent restrictions on businesses and livelihoods on top of forthcoming foreign debt repayments, the Central Bank recently reverted to its original rule on exporter dollar conversion rule and advised the government to raise fuel prices immediately in a bid to avoid any imminent implosion in the economy.

Energy Minister Udaya Gammanpila yesterday disclosed that the Central Bank had sent a letter to the Treasury Secretary on May 31, 2021 to immediately raise fuel prices as the bank was increasingly finding it challenging to manage the exchange rate due to rising global oil prices and falling inflows. 

Sri Lanka in May lost nearly half a billion dollars in foreign exchange reserves to end up with US$ 4.0 billion, and a billion dollar worth of International Sovereign Bond settlement is coming due on July 27, 2021.