Sri Lanka’s rupee trade in spot forex market without moral suasion

ECONOMYNEXT – Sri Lanka’s rupee traded freely in the spot market at 145.80 to the US dollar Thursday with no moral suasion or intervention, dealers said as the currency recovers from balance of payments crisis triggered by money printing.

Dealers said the rupee started to trade at 145.65/70 levels and moved down but there was no intervention.

The rupee has not been allowed to trade on the spot market for months as the central bank kept interest rates low, and bought Treasury bills to finance the budget deficit in 2015 pushing credit growth, aggregate demand and imports to unsustainable levels.

Sri Lanka’s new central bank Governor Coomaraswamy hiked policy rates 50 basis points last month, but the central bank also did not finally accommodate imports and credit by outright purchases of Treasuries for almost two months, forcing banks to borrow overnight.

Over the last two weeks it had bought or swapped dollars and covered the liquidity short, building up forex reserves in the process.

Sri Lanka has a dollar soft-peg which is euphemistically called a ‘managed float’ triggering currency collapses and balance of payments trouble every time the credit cycles picks up by trying to delay market interest rate hikes.

The IMF has given the central bank foreign reserve target. Dollar purchases to build reserves effectively reinforces the de facto peg, preventing it from appreciating as it would if the currency was floating freely. (Colombo/Aug26/2016)

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