Feb 16, 2012 (LBO) – The Sri Lanka rupee opened around 119.40/65 against the US dollar and later strengthened as much as 118.70/119.00 after briefly dipping in early trade, dealers said. Though there is a six monthly power tarrif adjustment process through a regulator, the process had been undermined twice over the last seven months on subsidy promises putting further pressure on the rupee.
Sri Lanka has raised power tariffs last night by between 15 to 40 percent, passing on outflows on energy imports into the domestic economy. Interest rates have been raised, and central bank interventions reduced.
The Central Bank said Wednesday the rupee has overshot its realistic value and policy actions have to been taken to cut credit and match outflows to domestic demand.
Analysts say the rupee came under pressure from high credit demand from productive sectors including new investments into hotels and unproductive state consumption credit taken by energy utilities to hide energy prices from the economy.
There have been steep adjustments to the fuel prices last week, which have sparked protests. At least one fisherman was killed in a police shooting.
Credit built up because Sri Lanka no longer has a transparent fuel pricing formula to immediately match developments in the balance of payments with domestic aggregate demand.