Sri Lanka’s economic growth (gross domestic product) would contract to – 4.6 percent in 2020, down from 2.3 percent in 2019 as the country grapples with Coronavirus and the currency has been hit by monetary stimulus, IMF forecasted.
Police curfews in the second wave of Covid-19 in many districts have hit the real economy and the currency is under pressure from liquidity injections, Finance Ministry officials said.
Sri Lanka however has already monetised debt, cut reserve ratios and also injected excess liquidity oversupplying cash to the credit system, which has also seen large cash draw down amid lock down style curfews.
As of mid-October, there have been net capital outflows of around US$500 million (0.6 percent of GDP) since mid February, mostly from the treasury securities market.
The COVID-19 fallout is seeing investor flight to safe havens, resulting in sharp increases to risk premiums or borrowing costs.
Sri Lanka too, is high on the watch-list given its back-to-back foreign debt settlements to the tune of $ 3-4 billion with only $ 6.7 billion official reserves in hand as of September 2020.
Under these conditions, a flexible exchange rate – with limited intervention to soften excessive volatility – seems to be the surer bet. Defending an exchange rate that is not reflective of economic fundamentals will only lead to a futile rundown of official reserves as a short-term solution.
Weekly AWPR for the week ending 23rd October 2020 decreased by 79 bps to 5.72 per cent compared to the previous week, Central Bank announced.
The reserve money increased compared to the previous week mainly due to the increase in currency in circulation and deposits held by the commercial banks with the Central Bank.
The total outstanding market liquidity was a surplus of Rs.150.609 bn by end of this week, compared to a surplus of Rs.123.111 bn by the end of last week.
During the year up to 23rd October 2020 the Sri Lankan rupee depreciated against the US dollar (1.4 per cent).