Sri Lanka must not intervene excessively to maintain peg: economic minister

Jan 26, 2012 (LBO) – Sri Lanka should not intervene excessively to maintain a peg with the US dollar, economic development minister Basil Rajapaksa said as reserve losses mounted in a bid to keep the rupee at 113.90 to the US dollar in the spot market. “I feel there must be a realistic value of our rupee,” minister Rajapaksa told reporters.

“Getting involved either way – to devalue or to keep the value – I think we must not intervene in a big way.”

An International Monetary Fund team is now in Sri Lanka in part to discuss a 2.5 billion US dollar bailout it gave in May 2009.

The lender suspended the program last August amid strong peg defence, advising Sri Lanka to be more flexible in its exchange rate management.

Sri Lanka created a soft-pegged exchange rate in 1950 as part of the Bretton Woods system of unstable pegs, which has created forex shortages and full-blown balance of payments crisis since then.

Unlike a hard peg or currency board, which Sri Lanka had from 1885 to 1950 a soft peg breaks because the monetary authority tries to control both the exchange rate and the interest rate by printing fresh money simultaneously.

The Bretton Woods system itself collapsed in 1971-73 firing a commodity bubble including an ‘o