Jan 03, 2017 (LBO) – Sri Lanka’s unsustainable practice of defending the external value of the rupee through market intervention should be stopped, the Central Bank Governor said.
Presenting the Road Map for Monetary and Financial Policy for 2017, Governor Indrajit Coomaraswamy said recent experience has clearly demonstrated that it is unsustainable to maintain an overvalued exchange rate at the expense of external reserves.
“Wasting large amounts of the country’s external reserves, much of it borrowed, in a vain effort to defend the currency, which has to be ultimately depreciated anyway, is clearly unsustainable,” he said.
“It is time to stop this and commence building up of external reserves through sustainable foreign exchange inflows.”
In 2011-12 period, the currency depreciated by around 14 percent even after expending 4.0 billion US dollars of external reserves.
There was a similar experience in 2015 when the currency depreciated by 6.5 percent after spending 2.1 billion US dollars of reserves.
Coomaraswamy said a smooth market based exchange rate would prevent highly disruptive adjustments after a period of stable rates artificially maintained by continuous intervention by the Central Bank.
“The policy measure is to have a cushion in terms of reserves. One of the key lessons of the Asian crisis is that you must have insurance in terms of your external reserves,” he said.
“If you look at the Asian economies, they have realized that you must have a strong buffer of reserves in order to cope.”
As proposed in the Budget 2017, a new Foreign Exchange bill will be presented to the Parliament during 2017 with further relaxing of foreign exchange transactions.
“Actually, evidence shows that if you do liberalize; more money actually comes in,” Coomaraswamy said.
“The stronger our external position is the more you can liberalize exchange controls.”
Deputy Governor P. Samarasiri said all current account transactions will be liberalized by law under the new Foreign Exchange Management Act.
In terms of capital accounts, certain management provisions will be there basically in the interest of the economy, Samarasiri futher said.
The road map document can be viewed here