June official reserves maintained at US$ 4.0bn

Sri Lanka’s foreign exchange reserves were maintained at US$ 4.0 billion by June-end, virtually unchanged from a month ago, but the buffer could dip if the full line up of inflows does not materialise to make up for the billion-dollar outflow scheduled on July 27 to settle a sovereign bond.

Despite the weakness in foreign exchange reserves in recent times, predominately due to loss of key foreign exchange earning sources such as the tourism trade, the reserve buffer held up during June, which was sufficient for 2.7 months of imports, as export earnings showed signs of recovery while the Central Bank continued to purchase dollars from mandatory conversions of export earnings receipts and remittances. 

The Central Bank together with the government also have lined up foreign liquidity lines to the tune of US$ 2.5 billion during the remainder of the year from a mix of instruments consisting of swap facilities, term loans, syndicated loans and the special drawing rights allocation from the International Monetary Fund.

Central Bank Governor Prof. W.D. Lakshman said although there could be a temporary dip, they would recoup the reserves shortly with the envisaged inflows, which are lined up as a stop-gap measure to overcome the near term challenges.  

The Central Bank also took some harsher measures lately to limit foreign exchange outflows to prevent certain parties from engaging in excessive speculation. 

The Central Bank said they had observed significant front loading of import orders due to expectation of further depreciation of the rupee against the dollar and the uncertainty over whether the government would ban their imports. 

On the other hand, exporters have also begun to withhold significant amount of their dollar earnings from converting as they expect to profit from further depreciation of  the rupee.

These conflicting objectives, which gained more intensity in recent times caused the current shortage of dollars and thereby the pressure on the exchange rate, prompting the banks to delay or restrain certain non-essential imports as they have been instructed to manage their foreign currency outflows within their inflows until short-term pressures recede. 

But the Central Bank said they in no way had instructed to limit the intermediate good imports identified as essential.

Since the recent restoration of the exporter conversion rule on its original form, the Central Bank is seeing some increase in mandatory conversions as exporters are now required to convert 25 percent of their export proceeds within 30 days of repatriation. The Central Bank purchases 10 percent of that. 

Further, 10 percent of remittance income is also purchased by the Central Bank to re-build reserves through non-debt creating inflows. 

During the second half of the year, the Central Bank plans to purchase US$ 350 million through mandatory conversions while their full year target is at between US$ 650 million to US$ 700 million.