Central Bank purchases US$ 63mn from forex markets in April

The Central Bank bought US$ 62.81 million from the domestic foreign exchange market in April, as the monetary authority was making net absorptions in its quest to re-build reserves out of non-debt creating foreign currency flows. 

April marked the third consecutive month of net purchases of foreign currency after the Central Bank bought US$ 75.31 million in March reaching the highest monthly net absorptions since August 2020.

The Central Bank remained a net purchaser of foreign currency so far this year, despite being a seller in January due to extreme volatility in the dollar - rupee exchange rate that emerged that month, which has continued to-date. 
Despite being a challenging year with subdued foreign inflows and stall in tourism flows, the Central Bank accumulated reserves through net purchases in 2020 due to continuous purchases of dollars since May 2020 through November 2020, when the foreign earnings were relatively strong.  
Sri Lanka’s foreign currency reserves recouped to US$ 4.48 billion in April after China Development Bank released a US$ 500 million loan, reassuring markets that the country will meet its upcoming foreign currency liabilities as it explores multiple options to access foreign currency funds. 

Further, the country also entered into a standby US$ 1.5 billion equivalent swap line with People’s Bank of China, from which Sri Lanka is yet to draw from. 

While the tourism trade is still in limbo due to the resurgence of the virus in the country, merchandise exports, remittances and other service inflows such as IT/BPO remain intact as Sri Lanka’s key markets are gaining steam as their virus related restrictions are easing. 

Meanwhile, the subdued domestic consumption due to restrictions on mobility and other activities could scale down imports, boding somewhat well for the country’s external sector as less mobility means less need for gasoline. 

But that comes at the expense of domestic economic recovery and output as consumption, which accounts for more than two thirds of the economy remains sub-optimal since mid-April and there is a higher likelihood that the current spate of virus related restrictions on in-person economic activities and travel restrictions could stay longer before they are eased.