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Sri Lanka’s CB independent; will intervene in forex markets if needed: Eran

ECONOMYNEXT – Sri Lanka’s central bank will intervene if there is excessive volatility in forex markets, but the finance ministry does not interfere in its operations, State Minister of Finance, Eran Wickramaratne said.

"I will go as far as to say that the central bank will punish speculators," Wickramaratne told an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce in Colombo.

He said the finance ministry does not interfere in the operations of the central bank. Wickramaratne said some of his earlier comments about central bank independence had been misunderstood as if there will be no intervention at all in the exchange rate.

Sri Lanka operates a soft-pegged exchange rate regime which the International Monetary Fund calls a ‘crawling arrangement’. Overall Sri Lanka seems to be driven by a trade oriented framework involving targeting of the real exchange rate.

Sri Lanka slashed bank overnight dollar positions after the rupee came under pressure from liquidity created from a forex swap earlier this month.

However Sri Lanka has a wide policy corridor with a floor rate of 7.25 percent and a ceiling rate of 8.5 percent which allows any liquidity that generated a shock to the credit system to disappear and rates to go up quickly as the currency is defended without a formal rate hike.

Currency crises are created because a central bank keeps injecting unlimited amounts of money after intervening (sterilizing foreign exchange sales) giving money for banks to lend without raising new deposits.

Analysts say the 8.5 percent ceiling rate is a key source of protection against any currency crisis. However a narrowing of the corridor will increase risks.

An episode of currency pressure in May showed that even if interventions are sterilized, as long as liquidity is injected close to or at 8.5 percent, any full blown currency crisis can be averted within weeks and rates can be later eased as the pressure goes away.

On September 11 the centarl bank has printed 9.2 billion rupees at 8.09 percent and on September 12 another 12.5 billion rupees at 7.97 percent for 14 days through term repo auctions (below the 8.5 percent rate) which will increase pressure on the rupee and delay the ending the run. (Colombo/Sept13/2018)





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