Central Bank’s forex purchases hit seven-month high in March

The Central Bank’s net purchases of foreign currency from the domestic foreign exchange market reached the highest since August 2020 as the monetary authority continued to accumulate foreign exchange despite the recent volatility seen in the rupee against the dollar, in their pursuit to rebuild foreign reserves from non-borrowed sources. 

The Central Bank purchased US $ 75.31 million from the foreign exchange markets in March, up from US $ 23.42 million in February and highest since US $ 93 million in net purchases of foreign currency in August, last year.What is also referred to as ‘net absorptions’ in the central banking parlance, reached its highest monthly amount in July 2020 when the Central Bank purchased US$ 162.5 million, which was made possible by the quick rebound seen in the exports since the end of lockdowns and the strengthening worker remittance flows since May 2020.The continuous purchases of dollars since May 2020 through November 2020 helped the Central Bank to emerge as a net purchaser of forex in 2020, offsetting the large net forex sales during March and April 2020 when the country’s regular foreign exchange earnings were disrupted by the virus 
related restrictions.

It was also commendable that the Central Bank still stays the course in accumulating dollars despite the recent adversity in the foreign exchange market where the rupee came under pressure against the dollar.The rupee touched a fresh low on Thursday, April 15 when the selling rate hit Rs.204.63 to a dollar before strengthening to Rs.201.28 on Friday, April 16 after the receipt of US$ 500 million term loan from the China Development Bank.

Sri Lanka, from last year, was distancing from foreign commercial debt for direct investments and exports to rebuild reserves, which will in turn strengthen the currency.  

The government is also gearing to enact a new law to provide easy passage of direct investments into the Colombo Port City, a potential game changer for the Sri Lankan economy and its people amid strong opposition from nationalist factions, who identify Port City as a ‘Chinese colony.’

Meanwhile, in a further bid to arrest the unwarranted volatility seen in the rupee/dollar exchange rate since early this year, the Central Bank a fortnight ago revisited its exporter dollar receipt conversation rule for the second time to provide more flexibility to exporters. 

With the revised instructions, the exporters are now required to convert 10 percent of their receipts from the earlier stipulated 25 percent within a period of 30 days since receipt of the exporter proceeds, up from 14 days earlier. 

Under the original rules of the exporter dollar conversation, the Central Bank was planning to collect US$ 1.2 billion through the end of this year.