External commitments weigh on Rupee stability

By Paneetha Ameresekere-2015-03-30

Ceylon Finance Today: The exchange rate (ER) last week closed virtually flat at Rs 133.50/55 to the US dollar in two way quotes in one week forward bookings in interbank trading, unchanged over its previous week's close, as Sri Lanka's external commitments and demand appeared to have got the better of Avurudu remittances and exporter conversions, which inflows were earlier expected to take the pressure off the rupee.

The ER in the previous week, i.e. in the week ended Friday, 20 March had closed at Rs 133.60 in one week's forwards and Rs 133.85 in two weeks forwards, with traders as at the following weekend, however, preferring to trade on one week forwards on thin volumes to close the week, market sources told Ceylon FT.

Such developments come in the backdrop where the latest position of Sri Lanka's external finances revealed that the authorities moved external spending closer to the US dollar one billion mark by dipping in to the country's foreign reserves to prevent depreciating pressure on the rupee.
CBSL's latest weekly economic indicators (WEI) showed that CBSL on a net basis spent US$ 72.6 million from the country's foreign reserves last month (February) to defend the rupee, thereby taking such spend in the last six months to February 2015 to a grand total of US$ 956.7 million.

Nevertheless, that has not prevented the rupee from depreciating. Statistics maintained by Ceylon FT showed that in the 30 week period since end August 2014 to date, the ER has depreciated by between 2.5% to 2.6%, or by Rs 3.27 to Rs 3.35, having had closed end August 2014 at Rs 130.20/23 in two way quotes in interbank 'spot' trading.
Further, such expenditure from the island's foreign reserves excludes Government of Sri Lanka's (GoSL's) foreign debt servicing commitments, which are also met from the country's foreign reserves. The country's foreign reserves as at end February stood at US$ 7.4 billion according to latest CBSL data, a decline of US$ 1.8 billion or by 23.8% from a recent peak of US$ 9.2 billion, achieved six months ago, i.e. as at end August 2014.

The depletion of those foreign reserves is as a result of the aforesaid actions.
Meanwhile, Sri Lanka's foreign debt servicing commitments in the 12 month period ending on 29 February 2016, is envisaged to increase by 2% or by US$ 115 million to US$ 6.02 billion, compared to its foreign debt servicing commitments of US$ 5.9 billion in the 12 month period ending on 31 January, 2016.
Ceylon FT's Tuesday's (24 March) lead story under the heading 'CBSL delays releasing key FX data' highlighted the delay in CBSL's WEI showing such latest data.

Nevertheless, three days later on Friday (27 March), CBSL's WEI made such data available.
WEIs are generally released every Friday of each week. Meanwhile, CBSL functioning under the previous regime made available details of CBSL's intervention in the foreign exchange market in the previous month, on the first Friday of the following or new month itself, but the present regime has been releasing such data only on the last Friday of the following or 'new' month, and not on its first.