September 01, 2007 (LBO) – The Sri Lanka rupee closed firmer against the greenback at 113.00/113.05 Friday trading two days without central bank intervention, giving confidence to the market. The spot dollar closed at 113.12/18 Thursday which was almost flat from the previous day.
The rupee had earlier been hit by heavy central bank market manipulation as well as continuing fiscal policy errors.
The central bank also talked up the rupee in a statement Thursday night which said a recent 0.99 percent depreciation was ‘unwarranted’ but stayed away from terrorizing dealers or intervening to the extent of de-stabilizing the monetary system forcing dealers to trade among themselves.
Most economic analysts agree that Sri Lanka’s external picture is relatively stable though it can be further undermined by fiscal profligacy.
There is also a threat from foreign rupee bond holders, but analysts point out that unless authorities go out of their way to help investors sell their bonds by mis-using the funds of the employee’s provident fund, a hit to the external sector would be contained.
Expectations are high among dealers that the rupee trading and liquidity would return to equilibrium levels next week.
Sri Lanka is also trying to raise 500 million dollars through a sovereign bond issue but is facing tough external conditions.
The outlook on Sri Lanka’s B+ rating was lifted to ‘stable’ from negative by Standard and Poor’s on the promise of market pricing energy.
However there was no new prices announced by the Ceylon Petroleum Corporation during the last week of the month.
However unexpected support for the rupee came from a an agreement with the Consumer Affairs Authority to market price liquid petroleum gas every two months. .