Sustained high oil prices and a growing repayment burden from the existing public dollar-denominated commercial debt could exert pressures on the balance of payments, it said.
" . . . a more market-based exchange rate regime would serve Sri Lanka well. Growing pressures on the foreign exchange market are likely and should not be resisted."
Frequent intervention may send mixed signals to the market and generate uncertainty, the IMF warned in an assessment of the island economy after its annual consultation with the government.
It urged the Central Bank to limit intervention in the foreign exchange market to smoothing excessive volatility.
Central Bank authorities told the IMF the rupee has been allowed to depreciate in an orderly manner throughout the year.