Central Bank of Sri Lanka (CBSL) Governor Nandalal Weerasinghe has said the bank is building foreign currency reserves without putting pressure on the rupee, even though reserves have grown slowly this year.

Speaking at a forum in Colombo titled “From Resilience to Sustainable Growth”, organised jointly by the Colombo Stock Exchange and the Securities and Exchange Commission of Sri Lanka, he said the bank was allowing a smooth, gradual movement in the currency in line with demand and supply in the market.

“We build reserves without creating volatility in the market,” Weerasinghe said. “I don’t think we are building reserves and creating volatility in currency by building reserves.”

He said reserve building had been slower this year because of the large demand for dollars from petroleum bills. According to the Governor, the Central Bank could have accumulated another US$ 2 billion if that amount had not been spent on petroleum after the Middle Eastern conflict.

“We are not in a crisis situation for us to build as much as what we wanted and that happened during 2023. We are in a better position,” he said. “That’s why we’re not in a hurry in building reserves and devaluing.”

Background

Sri Lanka has committed to the International Monetary Fund (IMF) to build reserves of around US$ 8 billion by the end of this year. The latest figures show reserves have stayed at around US$ 6.9 billion as of the end of September, which leaves a gap of about US$ 1.1 billion to that level.

The rupee fell sharply in March 2022, when usable reserves reached a low of around US$ 20 million. It has since recovered from levels of about 360 to the US dollar and is now trading around 330.

The rupee has weakened by 6.7 percent against the US dollar so far this year, with the steepest fall in May, when global oil prices rose sharply amid uncertainty over supplies.

The Central Bank can add to its reserves by buying dollars from the domestic foreign exchange market. When it buys a large volume of dollars, demand for the currency can push the rupee lower, which is why the pace of purchases matters for the exchange rate.

What it means

For households and businesses, the Governor’s comments point to a rupee that the Central Bank expects to move gradually rather than sharply. The exchange rate affects the price of imported fuel, medicine and food, as well as the value of money sent home by Sri Lankans working abroad.

The slow pace of reserve building also means that the IMF target of around US$ 8 billion by the end of the year has not yet been reached. The Governor said the Central Bank had chosen to be careful, and he did not set out a date by which the gap would close.

Weerasinghe’s remarks also show that fuel imports remain a major draw on the country’s dollar supply. Any further rise in global oil prices would add to that demand, according to the Governor’s own description of this year’s experience.