Dec 25, 2020

Sri Lanka to act ‘aggressively’ on forex market take dollar peg to Rs185 Featured

Sri Lanka’s central bank said it would aggressively to bring the rupee to 185 to the US dollar as the currency weakened towards 193 to the US dollar in forex markets in the wake of unprecedented money printing.

“The Central Bank is of the view that the recent increase in volatility of the exchange rate is unwarranted and unacceptable,” the monetary authority said.

“Accordingly, among other measures, the Central Bank will take appropriate action aggressively hereafter to contain this volatility in the domestic foreign exchange market.

“The Central Bank expects that these actions, together with the continuation of the curtailment of non-essential imports, will enable the Rupee to appreciate within the next few days towards the levels of below Rs. 185 per US dollar observed in November 2020.”

On Thursday the central bank sold dollar around 189.50 levels in the spot market to signal a weak side convertibility undertaking of the peg, after one week’s traded around 193 to the US dollar.

There is no market clearing interbank rate at spot.

One week’s continued to be quoted around 193.00 to the US dollar later, market participants said.

Meanwhile the commercial bank average selling rate for Telegraphic transfers published by the central bank went up to 194.66 to the US dollar from 193.05 a day earlier.

Sri Lanka has printed unprecedented volumes of money, partly due to the failure to sell Treasuries in the domestic market at controlled rates, and excess liquidity is now about 25 percent of reserve money defined without excess reserves.

The central bank said it had sufficient foreign exchange rates.

“At present, gross official reserves are at US dollars 5.6 billion. Discussions with the Central Bank’s domestic and foreign counterparts to boost the level of reserves are also reaching an advanced stage of conclusion,” the central bank said.

“The receipt of these expected inflows as well as the ongoing improvements in the domestic production economy leading to the expansion of foreign exchange earnings will facilitate the maintenance of exchange rate stability, while meeting Sri Lanka’s debt obligations on time, in the period ahead as well.”

When excess liquidity from printed money turns into credit, an imbalance is created in the balance of payments.

To defend the currency against the excess liquidity and mop it up in the forex markets to bring interest rates in line with the balance of payments, the central bank will have to spend about 1.2 billion US dollars (Rs231bn/189 = US$1.22bn) analysts point out.

Sri Lanka has controlled imports but analysts point out that the credit is fungible.