Sri Lanka rupee slides to new low of 142.50/70 to dollar amid excess liquidity

ECONOMYNEXT – Sri Lanka’s rupee slid to a new low of 142.50/70 to the US dollar in intra-day trade Tuesday amid high excess liquidity in money markets, but private bank selling made it recover some losses, dealers said.

The rupee opened around 142.20/25 to the US dollar in the spot market, close to yesterday’s close and was traded at 142.50 levels.

It was quoted as low as 142.50/70 to the US dollar, when private bank selling helped it bolster at 142.35/45 levels.

Excess liquidity in money markets rose to 143.8 billion rupees on Monday, from Friday’s 134 billion rupees. Last week excess liquidity rose by at least 28 billion rupees as money printed on Friday.

When money is printed through domestic operations (buying up Treasury bills) the excess demand generate imports, and the Central Bank has to sell forex reserves to mop up the billions of extra rupees, flowing out as imports.

If the rupee is not defended it will fall.

Analysts have pointed out earlier that the central bank’s domestic and foreign exchange operations are both weighted against the rupee during balance of payments crises.

Sri Lanka’s Central Bank which operates a classic ‘crawling’ third world peg, generates balance of payments crises every few years by preventing interest rate rises when credit growth picks up.

The current balance of payments crisis is mostly triggered by money printed to finance state worker salaries.

Meanwhile there are also fears that authorities may be deliberately devaluing the rupee in a bid to push low wage exports after Prime Minister Ranil Wickremesinghe said earlier this month that a ‘competitive exchange rate’ will be provided for exports.

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In December when the current balance of payments crisis began the rupee was about 131 rupees.

While currency devaluation creates low wage jobs, it destroying capital which is necessary to boost labour productivity and takes away both the tool and the incentive to increase it.

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