ECONOMYNEXT – Sri Lanka’s rupee closed at 337/346 to the US dollar Thursday in the spot market after opening at 340/345 to the US dollar, dealers said.
The spot dollar was offered 399 to the US dollar Wednesday, with no bids.
There were some dollars provided for import bills, Thursday dealers said.
There were deals at around 340 to the US dollar in early trade but bids were shifted to around 337 later in the day.
Sri Lanka’s central bank, bought dollars heavily as the rupee appreciated following the lifting of a surrender rule, banks oversold and importers stayed in the sidelines and the rupee appreciated to around 320 to the US dollar.
The rupee weakened in thin trade as banks settled bills in house and tried to cover their short positions.
Some banks were now square, dealers said.
In recent there is around 200 million dollar a month excess that the central bank was able to keep due to negative private credit.
Sri Lanka operated a peg with broadly consistent policy up to March 07, and shifted to a so-called flexible exchange rate or an ad hoc peg.
Up to the ad hoc peg, the central bank had bought dollars through a surrender rule, preventing appreciation and sold back for large import bills maintaining a consistent-policy-peg and only keeping the residual after giving back dollars to demand coming through domestic credit.
Flexible exchange rates, which are neither free floats nor hard pegs, are found in countries with high inflation, high interest rates and if the country has market access, sovereign default.
Several countries with depreciating flexible exchange rates or ad hoc pegs, were able to access capital markets in recent years due to exceptionally loose monetary policy run by the Fed, who have since defaulted or are close to default.
The experience in March shows that if the IMF sets high enough reserve target, the rupee can still depreciate, even if there is negative credit there is a small balance of payments surplus and the central bank has full control of the exchange rate, analysts warn.
In the past, the IMF came in when money and exchange policies came into conflict and forex shortages (balance of payments deficits) emerged.
But now IMF programs themselves contain an inflation target (domestic anchor), which allows inflationary policy, conflicting with a reserve target, triggering currency crises within the duration of a 4-year program. If they have market access they default. (Colombo/Mar15/2023)