Foreign reserves rise by US$ 107mn in May

Sri Lanka’s gross official reserves recorded a slight improvement in May, rising by US$ 107 million to a provisional estimate of US$ 6,873 million. 

This increase from the US$ 6,766 million recorded at the end of April 2026 was achieved independently of the latest International Monetary Fund tranche. While the IMF’s combined fifth and sixth reviews unlocked approximately US$ 695 million, these funds were expected to be credited in June rather than May. The current reserve position also continues to include the proceeds from the People’s Bank of China swap arrangement, which remains subject to conditionalities on its usability. The Central Bank of Sri Lanka actively intervened to manage domestic foreign exchange liquidity during the month, resulting in dollar sales spiking to a 33-month high. During May 2026, the Central Bank operated as a heavy net supplier to the domestic market, recording total sales of US$ 223.3 million against minimal purchases of just US$ 12.0 million.  This marks the highest sales volume since August 2023. To put this in context, the sales in May alone were almost equal to the total sales conducted during the entire six-month period from November 2025 to April 2026. Despite this significant monthly intervention, the Central Bank remains a net purchaser year-to-date, with cumulative net purchases totaling US$ 486 million. These heavy interventions reflect significant pressure on the local currency during the month. The exchange rate experienced volatility, shooting up towards Rs. 350 per US dollar before falling back toward the Rs. 330 level. By June 5, 2026, the Sri Lankan rupee had recorded a year-to-date depreciation of 7.8 percent against the US dollar. For the reporting week ending June 5, the average buying rate for the US dollar stood at Rs. 332.28, while the selling rate was Rs. 342.00. A significant driver of this external sector pressure stems from sharply rising import bills for fuel and motor vehicles. High international crude oil prices and the necessity of additional fuel shipments have placed considerable strain on the country’s trade balance. Simultaneously, a surge in motor vehicle imports has placed additional stress on the country’s foreign exchange reserves and domestic credit expansion. To curtail this excessive exposure and safeguard the financial system’s resilience, the Central Bank recently intervened by tightening the loan-to-value limits on motor vehicle financing, capping the maximum ratio for unregistered vehicles at a restrictive 40 per cent. Looking at broader foreign exchange market dynamics, forward transactions indicate persistent activity in managing future currency risks. As of June 4, 2026, the outstanding forward transaction volume stood at US$ 587.28 million, an increase from the US$ 552.69 million recorded a week earlier. Additionally, the country faces predetermined short-term net drains on foreign currency assets totalling US$ 2,142 million over the next twelve months. However, the impact on overall reserves was buffered by strong inward remittances, which amounted to a robust US$ 847.0 million in May 2026.

Going forward, the Central Bank faces a challenging balancing act. Under its ongoing economic program, the monetary authority has given an undertaking to the IMF to purchase US$ 2,200 million during 2026 to accumulate reserves. (NF)