ECONOMYNEXT – Sri Lanka’s Central Bank’s “aggressive” dollar buying has prevented sharp appreciation of the rupee, dealers say, as the rupee is under upward pressure amid negative credit and the lifting of a surrender rule.
The rupee is trading between 312-318 against the US dollar compared to 360 level a week ago, showing a near 15 percent rise.
The sharp appreciation comes amid speculation over dollar inflows from International Financial Corporation into three private banks and further inflows soon after the International Monetary Fund (IMF) Executive Board approval of a $2.9 billion loan later this month.
The IMF money however does not flow to the market but to the central bank itself and has no effect on the domestic forex market. IMF also does not give any money until monetary policy is tightened and the exchange rate is floated prior actions, to make sure that reserves it gives are not used for imports.
The IFC money is however is a swap for import financing which cannot be sold in the domestic market.
“The rupee would have easily hit 275 rupees against the dollar if not for the central bank’s aggressive buying,” a currency dealer told EconomyNext asking not to be named.
“This is mainly due to exporters selling their dollar holdings to have cash inflows for the future without borrowing at a high cost after the central bank raised the interest rates.”
“The volume of dollar conversion has declined today and I think the rupee will stabilize somewhere around 310 level. But it all depends on where the central bank wants the rupee.
The central bank in a surprise move raised the policy rates by 100 basis points on Friday (3), a move backed by the IMF.
Other analysts said the central bank has bought more than $100 million from the market in the last three days.
“The appreciation will continue as long as the central bank’s import ban and non-repayment of foreign loans continues,” another currency dealer said.
However Sri Lanka had tighter import controls in 2020 and it failed to stop the pressure on the rupee or loss of foreign reserves.
“Balance of Payments difficulties cannot be solved by intensifying the rigorous of exchange control and
import restrictions; nor by extending the schemes for expanding domestic production to substitute import goods — the so called measures for “economising” on foreign exchange,” classical economist B R Shenoy told President J R Jayewardene in a report in 1966 when the country had experienced forex troubles.
“The remedy to this problem lies in putting a stop to inflationary financing, not in tampering with the normal course of international trade.”
Sri Lanka has now tightened monetary policy and hiked rates to halt inflationary financing generally known as money printing.
The current rupee also appreciation comes amid a fall in exports. In January 2023, exports fell to 978 million US dollars from 1,103 million US dollars. In 2022 when the country experienced severe forex shortages, exports went up.
Related Sri Lanka exports rise 20-pct in June 2022 amid forex shortages
The rupee rise has led to a reduction in the price of several imported goods including wheat flour and sugar.
The currency, which became the world’s best performing currency so far this year, is expected to decline and lose almost a fourth of its value against the dollar by end-2023, Fitch Solutions has predicted, Bloomberg has reported.
Currency dealers, however, said the 390 rupee per dollar year-end estimation by Fitch “may be unlikely”.
“The same rating agency gave a high rating for banks which faced closure in 2008 due to subprime mortgages. However, the rupee may come under pressure when the import ban is removed, but we do not see it going to the level Fitch has expected,” a third dealer said.
Sri Lanka’s rupee collapsed from around 200 against US dollar to 370 within a few weeks last year after the central bank artificially kept the rupee down printing trillions of rupees in 2020 and 2021.
Analysts say exporters can still hold the dollars in their foreign account for import requirements though the central bank has asked them to convert all the dollars within 180 days.
Many Sri Lankan businesses have opened branches in Dubai, Singapore, and Hong Kong among many other foreign countries since the unprecedented economic crisis started in mid 2022. (Colombo/March09/2023 – Updated with economists comments)