Mar 06, 2009 (LBO) – The Sri Lanka rupee traded at 114.20/25 against the US dollar in the spot market after the central bank said it had gone for an International Monetary Fund bailout. Dealers say exporters are hoping for a devaluation of about 5 percent at least, though it is uncertain whether the currency needs to depreciate that far.
A cleanly floating exchange rate can also reduce interest rates. But past experience has shown that many Third World ‘managed float’ central banks that frequently get into balance of payments troubles by definition have a strong aversion to clean floats.
However Sri Lanka’s foreign reserves have provided a bulwark against external sovereign default in the past.
In Third World pegged countries where the government itself has junk ratings below ‘BBB-‘, central bank reserves can give comfort to external creditors, as a sign of sovereign solvency.
Sri Lanka only has a B+ rating now with a negative outlook from Fitch.
The Central Bank said IMF support “would enhance the assistance from other development partners as well as significantly improve international investors’ confidence on Sri Lanka.”