ECONOMYNEXT – Sri Lanka is keen to keep the exchange rate at the current level of 200 to the US dollar and is using pressure to influence the market, while simultaneously attracting inflows and implementing fiscal measures to shore up the currency, Central Bank Governor W D Lakshman said.
“We are very keen (vi-shar-ler unanduwak) to keep it at that level or at a higher level,” Governor Lakshman told reporters at an online briefing.
“That is to say to keep the rate at 200 or below. We expect to raise (iher-ler-nung-var ganeemer) the value of the rupee.”
“Our expectation is that we can do it. At the moment it is through the certain influences to pressure market (baler-paam idiripath-kireemen) that we are keeping the exchange ate at the current level.”
Sri Lanka’s rupee is now at around 200 to the US dollar with banks barred from selling the currency above 203 to the customers and outright interbank transactions barred from being made above 200.
Sri Lanka’s rupee has come under pressure from extraordinary money printing through 2020 to boost growth and keep down Treasury bill yields by turning legacy debt into liquidity.
However analysts have traced the origins current currency crisis to August 2019, when ‘output targeting’ began with bill and bond purchases and the central bank lost the ability to mop up reserves.
Sri Lanka has had forex shortages since a money printing soft-peg with Keynesian counter-cyclical powers based on a model used in some Latin American countries was set up in 1950 abolishing non-discretionary East Asia style currency board.
Analysts and classical economists have called for a currency board to be re-established to prevent chronic monetary instability.
There have also been warnings that the use of central bank swaps coupled with continued liquidity injections may lead to negative foreign assets in the monetary authority which will lead to involuntary market dollarization as had happened to several Latin American and Asian countries where Fed experts set up central banks with similar monetary laws.
Sri Lanka’s Colombo Port City is fully protected from the central bank’s discretionary policy through multiple currency dollarization, the most free market monetary system now imaginable as free banking no longer exists.
Meanwhile Governor Lakshman said the central bank was taking measures and the government was also taking measures to stabilize the exchange rate.
Since the statement, the government has raised fuel prices.
Late in 2020 the central bank said it wanted the rupee at 185 to the US dollar.
“Actually when we did the 185 forecast – or rather our policy aim was disclosed – we actually had reasonable expectations that the exchange rate could be kept at that level,” Governor Lakshman explained.
“Those conditions have changed to a most extend in the recent past.”
He said inflows and outflows of foreign exchange were key factors in determining the foreign exchange level.
“In the recent past, through various means, we made efforts (mahansi guth-thar) now also we are making efforts to increase the inflows to the country,” he said.
“Depending on the success of those and the success of limiting external flows we can control the exchange rate at the current level or protect it (rakkker ga-nee-mer-ter) to a better level.”
Governor Lakshman warned that Sri Lanka’s exchange rate was not a variable to about which exact predictions can be made.
To fix a currency against another (hard peg or credibly peg), overnight rates have to be floated and money printing abandoned.
Due to money printing and maturity mis-matches of dollar loans extended, especially state-banks to SOEs in particular Sri Lanka’s domestic dollar yields have outpaced rupee yields, leading forward exchange rates trading at a discount in the swap market, analysts have said. (Colombo/June16/2021)