IMF welcomes Sri Lanka Central Bank’s decision to stop defending rupee

Feb 10, Colombo: The International Monetary Fund (IMF) has welcomed the decision taken by the Central Bank of Sri Lanka to stop intervening in the rupee exchange rate and allow the market to determine the rate instead.

In a notable policy change, the Central Bank on Thursday announced that it has decided to allow the market to determine the rupee exchange rate.

The IMF resident representative for Sri Lanka Koshy Mathai in an e-mailed statement has told Reuters that the IMF welcomes the move toward greater exchange rate flexibility and it will help contain the trade deficit and protect the depleting foreign exchange reserves.

“This step, supported by a firm monetary and fiscal policy stance, should help to reduce the trade deficit and safeguard reserves at the Central Bank,” Mathai has said.

Since July 2011 the Central Bank had poured more than US$ 2.7 billion into the market depleting the gross reserves by a third from a high of US$ 8.1 billion in July to keep rupee steady.

The IMF last September following the seventh review of the US$ 2.6 billion Stand-By Arrangement advised the Central Bank to restrict its intervention and allow more flexibility in rupee exchange rate as the non-borrowed reserves have steadily declined.

However, the Bank rejecting the IMF’s suggestion defended its foreign exchange policy saying that the Bank’s policy is appropriate and it will continue to follow the same policy.

The IMF has withheld the last US$ 900 million after the Central Bank decided in September last year to maintain the rupee exchange rate.

The government which was in favor for a market-driven policy devalued the rupee by 3 percent on November 20 aiming to increase the competitiveness and exports out of the country.

The IMF commended the devaluation and said the move to devalue the rupee will help boost exports and conserve foreign-exchange reserves.

The Governor of Central Bank Ajith Nivard Cabraal told Reuters that the Bank will now intervene based on a quantity only to meet any shortage in the currency market for the country’s oil bills.

Following Thursday’s decision the currency weakened to a nearly three-year low of 116.20 at one point and recovered to 115.00 rupees per dollar.

The Central Bank last week raised the interest rates for the first time since 2007 to control the spiraling trade deficit and to stop the decline in foreign reserves.

In the first eleven months of 2011 the trade gap expanded by 111.3 percent to US$8.84 billion compared to the same period in 2010.

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