Wednesday, May 31, 2023

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Central Bank continues its dollar buying spree amidst IMF deal

Sri Lanka’s Central Bank continues its unending aggressive” dollar buying spree has prevented sharp appreciation of the rupee, dealers say, as the rupee is under upward pressure amid negative credit and the lifting of a surrender rule.

The statement approving Sri Lanka’s Extended Fund Facility (EFF) by the IMF this week said the Central Bank aims to buy up to US $ 1.4 billion from the market and rebuild the external reserves to US $ 4.4 billion by the end of the year.

The spot rupee, which opened around 320 against the US dollar, fell further to 317 to 318 levels by mid day trading yesterday, a day later the International Monetary Fund (IMF) opened up the nearly US $ 3.0 billion life line to the crisis-hit country.

The rupee, which gained around 12 percent, lost some ground last week to end at around Rs.337 to a dollar.

But the news on the IMF deal approval and the optimism over further inflows from other bilateral and multilateral sources improved sentiments, sending the rupee higher against the US dollar by mid trade yesterday.

By the week ended on March 17, the rupee was up about 7 percent from the start of the year but by yesterday, it extended its gains to 12 percent again.

The currency traders and economic analysts expect the rupee to continue to gain and trade in a band between 280 and 300 to the US dollar.

The country also awaits a large decline in fuel prices in a few weeks, amid the sharp dip in global oil prices, which to an extent could alleviate the hardships faced by the public and small businesses.

The rupee is trading between 312-318 against the US dollar compared to 360 level a week ago, showing a near 15 percent rise.

“The rupee would have easily hit 275 rupees against the dollar if not for the central bank’s aggressive buying,” a currency dealer said asking not to be named.

“This is mainly due to exporters selling their dollar holdings to have cash inflows for the future without borrowing at a high cost after the central bank raised the interest rates.”

Other analysts said the central bank has bought more than $100 million from the market in the last three days.

“The current rupee also appreciation comes amid a fall in exports. In January 2023, exports fell to 978 million US dollars from 1,103 million US dollars. In 2022 when the country experienced severe forex shortages, exports went up.Related Sri Lanka exports rise 20-pct in June 2022 amid forex shortages

The rupee rise has led to a reduction in the price of several imported goods including wheat flour sugar and milk powder.

The Central Bank in February bought US $ 287.0 million in foreign currency and sold US $ 33.4 million, remaining a net purchaser of foreign currency so far this year. In January too, the Central Bank bought US $ 348.8 million and sold US $ 137.6 million.

Meanwhile, although no official data is available yet, the Central Bank has bought dollars to the tune of US $ 500 million since the surrender rule in place for the exporters was initially relaxed and done away a week later.

In the first week itself, since the rule was relaxed from 25 percent to 10 percent, the Central Bank had bought US $ 308 million, the most for any five-day period.

“We have now bought around US $ 500 million,” told Central Bank Economic Research Director Dr. P.K.G. Harischandra, joining in a television talk show a couple of weeks ago.

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