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Sri Lanka must not intervene excessively to maintain peg: economic minister
26 Jan, 2012 07:50:02
Jan 26, 2012 (LBO) - Sri Lanka should not intervene excessively to maintain a peg with the US dollar, economic development minister Basil Rajapaksa said as reserve losses mounted in a bid to keep the rupee at 113.90 to the US dollar in the spot market.
"I feel there must be a realistic value of our rupee," minister Rajapaksa told reporters.

"Getting involved either way - to devalue or to keep the value - I think we must not intervene in a big way."

An International Monetary Fund team is now in Sri Lanka in part to discuss a 2.5 billion US dollar bailout it gave in May 2009.

The lender suspended the program last August amid strong peg defence, advising Sri Lanka to be more flexible in its exchange rate management.

Sri Lanka created a soft-pegged exchange rate in 1950 as part of the Bretton Woods system of unstable pegs, which has created forex shortages and full-blown balance of payments crisis since then.

Unlike a hard peg or currency board, which Sri Lanka had from 1885 to 1950 a soft peg breaks because the monetary authority tries to control both the exchange rate and the interest rate by printing fresh money simultaneously.

The Bretton Woods system itself collapsed in 1971-73 firing a commodity bubble including an 'oil shock' as the US defaulted on its obligation to defend a peg at 35 US dollars an ounce amid excessive money printing during the Vietnam War.

Advanced nations moved to floating exchange rates and countries like Singapore moved back to a currency board, but Sri Lanka persisted with the soft peg. In the 1970s Sri Lanka imposed trade and exchange controls and engaged in import substitution.

Treasury Secretary P B Jayasundera said oil prices were high and there was sluggish global recovery and each country had to manage their problems.

"I hope as we managed in 2008/9 we can address the current situation," he said.

The International Monetary Fund gave a 2.5 billion US dollar bailout after the rupee was floated in April 2009.

A 'float' breaks a cycle of intervention and liquidity injections made to sterilize or offset rupee losses from dollar sales.

The IMF suspended the program, holding back the last two tranches as peg defence became excessive after July 2011.

Jayasundera said food production would be increased in an 'import replacement' drive to help the exchange rate.

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READER COMMENT(S)
5. analyst Jan 30
The Problem lies here. Economic Minister who is only a politician is trying to preach economics. Treasury Secretary who is supposed to be an economist is playing politics.We the people suffer due to these square pegs in round holes.
4. RXR Jan 27
A strong currency is a sign of an efficient/vibrant economy, example like Germany, which is in fact not in trouble, but technically is dragged down by Greek, Spanish, Portuguese, Italian, etc debt, thanks to a monetary union.

Coming back to Sri Lanka or any other country in fact, the rate has to be determined by a free float and not by a pump and dump of Foreign Exchange and T Bill stock by the Central Bank, aka sterilization.

3. Sumedha Jan 26
We should devalue our money whenever possible. The people in the country lead a life that is much better than it was 10 years ago...but let's not forget what happened in the west as well as in China. Who's the winner now? Meteoric rise in Chinese per capitabecause it saved and labored without listening to western propaganda. Let us do the same and prosper in a couple of decades. Our production is already less competitive when compared to regional economies. Don't kill our industreis!
2. Punchirala Jan 26
CBSL has become a "Handiye Kade". What Peg for these guys? When you get strangled only they will have to look for various other options. When you do not have a clear cut strategy these PEGs and BEGs will hit them. Now you PEG and later you BEG. You know in these typical village Kades, they cater to the day. When sugar is finished in the Kade, the Kade Mudalali will tell the customer "Seeni Evarai ne". This sounds very similar to our CBSL's activities. Waiting till the last minute (:

The bright side of this story would be, the public becoming the scape goats. Print money, expand credit..Live long Mother Lanka ):

1. Chris Jan 26
Maintaining the peg is a political mater and not a sound economic theory. It just makes things artificially less expensive. We have to face the economic hardships sooner or later in order the country moves forward and becomes self sufficient in order the value of Rupee to rise later on. Why not do it now?