In June 2024, Sri Lanka’s central bank was a net seller in the foreign exchange market, selling $57 million to banks without purchasing any dollars. This follows a previous trend where the central bank bought $224.5 million and sold $32 million in May. The build-up of excess liquidity reached 200 billion rupees due to dollar purchases in April and May.
Sri Lanka operates a flexible exchange rate, which analysts criticize for its inconsistency and lack of doctrinal soundness. When import demand rises, often due to increased private or state enterprise credit, the exchange rate tends to weaken, causing importers to buy early and exporters to delay transactions, leading to confidence shocks.
Excess liquidity decreased in June and July, although the central bank injected overnight liquidity into some banks as needed. Additionally, the central bank provided 7-day money below the overnight window rate.