Apr 06, 2012 (LBO) – Sri Lanka has retained the confidence of foreign holders of government debt by taking firm corrective steps to fix a balance of payments crisis, Central Bank Governor Nivard Cabraal said. The rupee has now strengthened to around 125 to the US dollar from a low of 131 rupees, though there are concerns about central bank credit in April.
The central bank is expected to end all interventions in the forex markets in May, when the pressure of sterilized foreign sales on the exchange rate will also end.
On Thursday the Central Bank raised policy rates by 95 basis points to 9.75 percent, a move that was called for by the International Monetary Fund, economic analysts and also the finance ministry.
The rupee which has been stable around 110 rupees to the US dollar fell to 131 rupees over the past several months after state borrowings spiked due to energy price manipulation amid strong private loan growth.
Energy prices were then raised, rates hiked and credit ceilings imposed on banks. Amid the policy changes there was no capital flight.
Most foreign bond holders not only stayed, but new ones came in.
“Even after our policy changes there were 400 million US dollars of inflows into Treasury bills and bonds,” Cabraal told the LBR-LBO CEO forum, a gathering of senior business executives in Colombo.
“Obviously someone who is parting with 400 million dollars, is parting with it because he has confidence. He is not parting with peanuts. So they have confidence.
“They have been able to assess out policy structures, they have been able to assess our macro outlook and they have been able to assess the policies we have been implementing.”