Sri Lanka unveils economic policies

COLOMBO, Jan 3: Sri Lanka’s rupee currency can be “flexible” in the future given pressure on the island nation’s balance of payments and declining reserves, but the central bank will not allow “volatile” moves, Governor Ajith Nivard Cabraal said on Tuesday.

Announcing the bank’s broader monetaiy and financial policies for 2012, Cabraal also said the country would negotiate with the International Monetaiy Fund for a follow-up programme as Sri Lanka nears completion of the Fund’s $2.6 billion loan programme tiiis year.

His comments are the first sign that the bank may be more willing to accept a weaker currency, something it resisted strongly by selling dollars from its reserves in the second half of 2011.

“It can move upwards or downwards, but it will not be allowed to give way to any hostile or speculative action,” Cabraal told Reuters when asked if the central bank will continue to maintain the rupee at the same level.

“It will not be at the same level forever, but it has the capacity to be moving not in a panic way. We won’t allow volatility, which is counter productive. There is no reason to panic at the moment.”
The central bank has intervened on both sides to maintain a stable rupee rate but the market’s bias has been for a weaker currency

Hie IMF has withheld the eighth tranche of the $2.6 billion loan after the central bank turned down its request for a flexible exchange rate and limiting intervention.

Sri Lanka will complete the IMF loan programme later this year and Cabraal said Sri Lanka would negotiate for a follow up programme with the Fund once it completes die loan.

“It will either be a surveillance or a follow up programme. We will have to negotiate it when they come next time and we will ask what land of a programme we can work out,” Cabraal said.

The island nation”s reserves declined to $6 billion at the end of 2011 from a record $8.1 billion in July last year as the central bank heavily defended the rupee.

The bank has spent around $710 million to keep the exchange rate steady since three per cent devaluation on November 21. It spent a net $1.36 billion in the first nine months of the year to keep depreciation pressure at bay.

Treasury Secretary P.B. Jayasundera last week said Sri
Lanka needs flexible exchange rates code for a devaluation as well as tighter monetary policy to discourage importers from taking excessive quantities of credit to buy imported goods.

The central bank had firmly said there will not be any further depreciation of the currency from the current 113.90 per dollar level after President Mahinda Rajapaksa in his capacity as the finance minister shocked the markets with a 3 percent devaluation on Nov. 21 when presenting 2012 budget.

Cabraal on Monday assured there will not be a depreciation though Treasury has said there will be another devaluation by between 2.5 percent to 3 per cent in early 2012.

Cabraal said the country’s economic output has reached $59 billion with growth of 8.3 per cent last year and he expected an 8 per cent expansion this year too and justified its rupee defence and more than $25 billion expected inflows in 2012 will help boost the BOP this year to record $825 million surplus.The expected $25 billion inflows include $12.5 from exports revenue, $6.5 billion from worker remittances, $2 billion from foreign direct investments, and $1.2 billion from tourism.

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