Dollar inflows rise, festive demand for imports drops

A combination of less festive/New Year demand for imports, lack of disposable incomes and increasing remittances along with enhanced foreign exchange flows from tourism has restored the Sri Lanka rupee to favourable proportions against the dollar.

On Thursday, the US dollar fell below Rs. 300 for the first time since July 2023, being traded at one point at Rs. 299.29 in the money market.

The reasons are many for the rupee to rise after a prolonged period of pressure from the US dollar in 2022 and 2023, bankers said adding that the Central Bank was regularly buying dollars from the market to stabilise the dollar and prevent it from further sliding against the rupee. “If not for Central Bank intervention, the dollar may have reached the Rs.270-280 levels,” said a dealer. In January 2024, the Central Bank bought US$245 million from the money markets and around $280 million last month. “The Central Bank seems to be buying $1020 million dollars a day from the market to prevent a sliding dollar vis-à-vis the demand and supply situation in the market,” he said.

March is the peak season of the year for imports ahead of supplies needed for the New Year but this year that demand was absent. “By this time, imports should have risen sharply which is not the case today,” a trader of essential goods said, adding that they have many stocks at hand since traders bought excess stocks before the VAT was increased.

The supply of dollars in the market is more than the demand for imports. Disposable incomes are also falling resulting in less demand for some essentials and white goods (cookers, refrigerators, washing machines, music sets, etc) for which some suppliers are offering special discounted rates to get rid of piled-up stocks.

Migrant workers are also seen as cashing in their foreign currency earnings fast amidst the depreciation of the dollar. Bankers said last year banks had to buy dollars to settle some dollar bonds triggering demand for dollars. “That pressure is not there now,” a banker said.

A foreign exchange manager of a local bank said there were many speculators in the market trading on the prospects of a further fall in the dollar.

Tourism revenue more than doubled in JanuaryFebruary 2024 to $687.5 million from $315.1million in the same 2023 months. Gross forex reserves were $4.5 billion at end February.