Sri Lanka should stop defending currency peg: IMF

Sri Lankan Police forming a human chain in parliament to protect the Speaker and enable a vote.

Sept 07, 2011 (LBO) – Sri Lanka should stop defending a dollar peg and allow the domestic currency to respond to market developments, the International Monetary Fund has said. Aitken said Sri Lanka’s interest rates were appropriate now but the central bank should watch credit growth and take action in the future.

The IMF cautioned against further forex reserve sales to defend the dollar peg.

“This policy does not seem to be in line with the fundamentals in the economy,” IMF mission chief to Sri Lanka Brian Aiken said.

“In responding to market pressures the Central Bank should henceforth limit its interventions and allow more exchange rate flexibility.”

In July Sri Lanka spent 416 million US dollars defending the dollar peg. Analysts say in August another 300 million dollars may have been spent.

Sri Lanka’s central bank has been selling dollars over the past several months (except in March and June which were test dates under an IMF program) to defend a dollar peg.

So far this week, the Central Bank has allowed the rupee to weaken 20 cents in two steps, but it has not been enough to halt peg defence, dealers said.

On Wednesday the spot dolla