Aug 10, 2009 (LBO) – Sri Lanka’s central bank has collected 289.10 million US dollars from forex markets in July, bringing the total to 739.35 million US dollars since the float of the currency in March, the latest official data shows.
The IMF has put in conditions to prevent inconsistent policy in the future, requiring the central bank to consult it in case there is renewed pressure on the exchange rate.
The IMF policy document agreed with the government said that “in the event of a
potentially disruptive movement in the nominal exchange rate against the U.S. dollar in either direction, the authorities will consult with Fund staff on the appropriate policy response.”
Instead of printing money and weakening the peg, the Central Bank is now withdrawing liquidity and tightening the dollar peg.
Since the float, the central bank has been buying dollars in forex markets and draining liquidity by selling down its Treasury bill stock, to lock up reserves.
Its T-bill stock which peaked at around 220 billion rupees at the height of the balance of payments crisis was down to 161 billion rupees by Aug 07.
Last week the central bank sold down its bills stock by 10.0 billion rupees draining externally generated liquidity. On Monday, a 7.0 billion rupee auction of 21-day bills was announced.
The Central Bank says gross foreign reserves increased to 2.1 billion US dollars by the end of July 2009 from 1.2 billion in March.
Sri Lanka ran into a balance of payments crisis in September 2009, when foreign investors fled the country amid international turmoil.
The central bank’s monetary policy which had been tight up to then and was complementary to exchange rate policy, reversed as it started to defend a dollar peg at 108.00 rupees.
Monetary policy and exchange rate policy turned contradictory from then on as a cycle of ‘sterilized intervention’ started, where the central bank printed money and tried to target the exchange rate at the same time.
Foreign hedge funds took away about 600 million US dollars from the country and exporters delayed converting dollars resulting in indirect speculation, as the credibility of the peg weakened amid inconsistent monetary and exchange rate policy.
Eventually Sri Lanka lost about two billion US dollars, and the country went to the International Monetary Fund.
In March the rupee was floated and monetary and exchange rate policy again turned consistent and the central bank is now defending a peg at 114.95, but monetary and exchange rate policy is now consistent.