ECONOMYNEXT – Sri Lankas rupee opened at 314.75/315.00 the US dollar, in the spot forex market Thursday, dealers said, with the central bank allowing the currency to appreciate amid a balance of payments surplus it has created, with appropriate monetary policy.
Sri Lanka’s rupee closed stronger at 315.50/70 to the US dollar.
Within the first hour of trading the rupee was quoted as strong as 313.30/314.00 to the US dollar, dealers said.
In a balance of payments surplus triggered by the sell-down of central bank held Treasury bills, the currency is under upward pressure and the central bank can decide at what rate to buy to stop appreciating.
Even if only a part of the liquidity from dollar purchases are mopped up, through domestic operations an overall balance of payments develops.
Sri Lanka’s central bank does not usually allow the exchange rate to appreciate in the credit slowdown that usually accompanies a currency crisis, though it did after the 2009 crisis.
Central Bank Governor Nandalal Weerasinghe has repeatedly warned the market that the rupee will no longer be a ‘one-way bet’ as in the past.
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Analysts have pointed out that maintaining an exchange rate or building reserves is a fairly easy matter for a country with a high savings rate as long as the central bank does not engage in inflationary open market operations to suppress rates as credit demand picks up, analysts have said.
Sri Lanka has had strong rainfall in the last quarter which has improved the cash flows of the Ceylon Electricity Board, allowing it to repay loans if it wished and reduce fuel imports.
However there are dry conditions in the first quarter of all years, which tends to trigger fuel imports and tighten cashflows of the agency. A tariff cut is also planned.
There was also a surge in imports at the tail end of the year to beat value added tax.
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Importers will also pay down any credit taken to import as the stocks are sold in the new year, analysts say.
Private credit has generally been weak in recent months.
Government non-interest cash flows have also improved with more taxes being collected and spending power transferred from the public to the state reducing credit pressure.
Reducing credit pressure allows the central bank to sell down treasury bills at a lower rate, continuing a balance of payments surplus.
Dollar purchases also adds liquidity to the banking system, but aggressive sell-downs of bills can reduce the pace of the rate fall.(Colombo/Feb01/2024)