April 06, 2009 (LBO) – Sri Lankan Central Bank governor Nivard Cabraal said there was greater space for markets to determine the exchange rate, as the country heads for an International Monetary Fund bailout. The Central Bank lost more than two thirds of its reserve trying to defend a peg with the US dollar from last September as short term capital fled the country.
Authorities have maintained that they intervened in the forex markets to maintain stability in the face of volatile global markets.
“We believe that there is greater space for the exchange markets to operate,” Governor Cabraal told reporters Monday.
“It is happening now also.”
The central bank ended interventions in the last week of March. After dipping to 116.10 rupees against the US dollar, the rupee firmed to 115.60 levels in intra-day trading Monday.
In April the exchange rate trends to be strong, with export firms selling dollars to pay festival advances, despite an expansion in the money supply and cash drawn out of the banking system in a ‘private sector sterilization’ phenomenon.
Pressure on the exchange rate usually resumes in May.
The ‘float’ of the rupee is a ‘prior action’ for an IMF bailout as central bank interventions in forex markets and simultaneous cash injections to money markets to sterilize forex sales results in fresh pressure on the currency and more reserve losses.
Cabraal said negotiations were still underway with the IMF, without elaborating.
An IMF bailout is expected in the last week of April if Sri Lanka can fulfil prior actions.
Sri Lanka had submitted a request for 1.9 billion US dollars from IMF, Cabraal said when asked to whether Sri Lanka could get a higher allocation, amid reports that the island may qualify for around 2.4 billion US dollars of assistance.
Officials said the investors into government treasuries markets as well as short-term credit to the state petroleum utility went out of the country. In October 2008 alone, more than 700 million US dollars had fled the country.
Sri Lanka’s gross official reserves (including net reserves) fell from 3,424 million US dollars in September 2008 to 1.415 million US dollars in January. The Central Bank’s net reserves fell to 1,142 million US dollars.
Since then 293.33 million US dollars had been spent on peg defence. Sovereign debt repayments are not captured in the data.