CBSL builds reserves without forcing rupee down

The Central Bank is building up Sri Lanka’s foreign currency reserves without putting undue pressure on the rupee, Governor Nandalal Weerasinghe said.

Sri Lanka’s reserves have been rising gradually, with the country committed to increasing them to around US$8 billion by the end of this year under its programme with the International Monetary Fund (IMF).

However, reserves remained largely unchanged at around US$6.9 billion at the end of September.

“We build reserves without creating volatility in the market,” Weerasinghe said 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 Central Bank was allowing the currency to move gradually in line with market demand and supply.

“We are allowing a smooth, gradual kind of movement in the currency in line with demand and supply in the market. That has to be reflected in the currency,” he said.

The rupee collapsed in March 2022 when usable foreign reserves fell to around US$20 million, with the exchange rate reaching about Rs. 360 to the US dollar. The currency has since recovered and is currently trading at around Rs. 330 to the dollar.

Weerasinghe said reserve accumulation had been slower this year because of increased demand for foreign currency to pay petroleum bills.

“I don’t think we are building reserves and creating volatility in the currency by building reserves. That’s why reserve building has been a little slow this year because of the large demand coming from petroleum bills,” he said.

The Governor said the Central Bank could have accumulated a further US$2 billion had that money not been spent on petroleum imports following the escalation of conflict in the Middle East.

“We are a little careful in building our reserves. 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. That’s why we’re not in a hurry in building reserves and devaluing,” he said.

The rupee has depreciated 6.7% against the US dollar so far this year, with the sharpest fall recorded in May as global oil prices surged amid uncertainty over supplies.