The Central Bank has immediately changed its stance on allowing the flexibility of exchange rate two days after its statement issued on Friday clearly stating that Sri Lanka’s monetary board can make changes to the exchange rate in the future if necessary, but the current level is appropriate.
This statement was made amid calls to float the currency stop reserve sales for imports.Several leading media reports highlighted the rupee floating matter which was transpired at the monetary policy review press briefing on Friday 04.
These news reports quoted Central Bank Governor Ajith Nivard Cabraal as saying that “It is the view of the Monetary Board (governing board of the agency) that the exchange rate at the current level is suitable.
“If in the future, some changes have to be done, we can do it. But at this time we think the level is appropriate.”
He was responding to a question on growing suggestions to float the rupee as forex shortages disrupted energy imports.
In a media release issued on Monday 07 Sri Lanka’s Central bank said it is abandoning a Rs 200 to the US dollar peg after printing money though multiple means which were making outflows greater than inflows, creating forex shortages and parallel exchange rates.
The central bank said “greater flexibility in the exchange rate will be allowed to the markets with immediate effect.”
“The Central Bank is also of the view that forex transactions would take place at levels which are not more than Rs. 230 per US dollar.”
The rupee is trading in the kerb market around 249 to the US dollar. Exporters have been selling unofficially around 245 to the US dollar.
It is not clear whether the 230 rate will be controlled or it will be allowed to free float.
Devaluations are hit or miss affairs, analysts say, unlike a clean float which is followed by a steep rate hike to curb domestic credit which succeeds every time.
The current statement came after a 100bp rate hike, which is still far below inflation of 15.1 percent with the budget deficit also around 10 percent of gross domestic product.
Central Bank hurridly announced on Monday 07 that, greater flexibility in the exchange rate will be allowed to the markets with immediate effect.
It is also of the view that forex transactions would take place at levels which are not more than Rs. 230 per US dollar. The Central Bank will continue to closely monitor the developments in the domestic foreign exchange market and make appropriate policy adjustments accordingly.
Announcing policy package to support greater macroeconomic stability, Central Bank noted that the decision of allowing flexibility in the exchange rate has been taken considering the severity of the external shocks and recent developments in the domestic front.
the Monetary Board of the Central Bank of Sri Lanka announced a comprehensive policy package on 04 March 2022 with the view to counter such economic headwinds.
The Central Bank also indicated that it will continue to closely monitor the emerging macroeconomic and financial market developments, both globally and domestically, and will stand ready to take further measures as appropriate, with the aim of achieving stability in the fronts of inflation, the external sector, the financial sector, and real economic activity.
In that context, greater flexibility in the exchange rate will be allowed to the markets with immediate effect.
The Central Bank is also of the view that forex transactions would take place at levels which are not more than Rs. 230 per US dollar.
The Central Bank will continue to closely monitor the developments in the domestic foreign exchange market and make appropriate policy adjustments accordingly
