CB sells over US $ 400mn to defend rupee in Dec.

Sri Lanka had a tough time during December in defending the rupee against a probable free fall against the dollar, amid a deepening foreign exchange crisis, as the Central Bank sold over US $ 400 million in the domestic market.

According to the data, the Central Bank sold US $ 424.71 million in December, the highest for any month, to defend the rupee pegged to the United States dollar, up from the previous high of US $ 372.35 million in November.

This brings to a US $ 353.55 million worth of net dollar sales from its reserves in December, as the Central Bank had to provide crucial dollars into the market to provide for the imports of daily essentials such as medicines, milk powder, fuel, etc.

This was an increase from US $ 310.64 million worth of net dollars sold in November to provide for the acute shortages in the foreign exchange market, which worsened from around July, last year, after the government repaid a billion dollar sovereign bond from its external reserves.

Despite the dollar sales, the things haven’t improved either. As of late, many trade bodies have highlighted the troubles faced by them in sourcing dollars to make imports. The latest group, which added to the chorus of calls to resolve the current foreign currency troubles, was the pharmaceutical importers. They warned of disastrous medicine shortages, if the authorities failed to immediately address the issues with regards to sourcing foreign exchange to open up letter of credits.

While the Central Bank started 2021 positively by continuously purchasing dollars for few months and staying as a net buyer of dollars, the virus, which re-emerged in April and the subsequent lockdowns turned it into a net seller of dollars, as foreign incomes dried and the country had to depend on its dollar reserves to pay for debt settlements and imports.

This created a shortage of foreign currency and the banks were forced to ration dollar issuances for imports, creating shortages in several commodities, which then led to run on the reserves, which hit a dangerously low of US $ 1.6 billion in November, equivalent to only a month of imports.

While the reserves were clawed back to US $ 3.1 billion just days prior to the ending of the year, with the drawdown of the US $ 1.5 billion equivalent yuan swap line from China, according to economists, the manner in which the swap arrangement had been accounted for in the books raises questions and the money could not be used for balance of payment purposes.

Central Bank Governor Ajith Nivard Cabraal told last week that they would rebuild the reserves up to four months of imports cover.