Sri Lankan central bank rejects currency crisis report
ECONOMYNEXT – Sri Lanka’s central bank Monday rejected a report that the island was at risk of a currency crisis, saying it had asked Nomura Holdings Inc., which made the analysis, to change its opinion.
The analysis by Nomura, which was published by international media, said seven emerging economies are at risk of an exchange rate crisis.
It described Sri Lanka as having the worst outlook “due to still-weak fiscal finances and a very fragile external position”.
Nomura analysts were quoted as saying about Sri Lanka: With [foreign exchange] reserves of less than five months of import cover and high short-term external debt ($160bn), its refinancing needs are large. Political stability also remains an issue.”
Sri Lanka’s central bank said in a statement that Nomura’s assessment of external debt was wrong.
“Given the fact that Sri Lanka’s short term external debt is nowhere near the US$ 160 billion figure that Nomura analysts have quoted, it appears that Nomura Holdings have made a serious computational error with regard to Sri Lanka’s external vulnerability,” it said.
“As such an erroneous report could to trigger an unwarranted panic amongst investors, particularly in the context of current volatile global market conditions, the Central Bank of Sri Lanka has already written to Nomura Holdings, and requested them to correct this error without any delay.”
Though any so called soft peg where a centarl bank tries to control the exchange rate and the interest rate is at risk like in Sri Lanka, a full blown currency crisis hits a country when economic and credit growth is strong and interest rates are low.
If credit growth is weak and banks adjust deposit rates quickly to credit demand, the likelihood of currency crisis is reduced analysts say. Sri Lanka’s credit growht is moderate at the moment. The stabilization of the currency after a bout of money printing in March/April 2018 is a case in point, analysts say.
Sri Lanka also market prices oil, which further reduces the risk of currency crisis as the pressure on the central bank to print money to keep interest rates down, when petroleum utilities borrow to finance subsidies is reduced. In Sri Lanka currency crises in 1999, 2004 (removing the plug), 2008/2009, 2011/2012 were triggered by central bank accommodated fuel subsidies.
However analysts have pointed out that the rupee also comes under pressure due to inconsistent policy by the central bank, involving defending a peg on its ‘strong side’ by purchasing dollars (or engaging in a swap), and switching regimes to a ‘flexible exchange’ by not consistently following through by defending the ‘weak side’ of the peg, when the rupee comes under pressure from the new rupees and credit. (COLOMBO, 10 September, 2018)