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Central Bank to rescue plummetting Lankan rupee using all ‘instruments’
Sri Lanka’s Central Bank (CB) will use all the ‘instruments’ at its disposal to ensure the LKR doesn’t weaken to unbearable levels against the US$, amidst an outflow of US$ 400 million so far this year.
The US$ which has rapidly gained against the LKR and touched Rs 170 on Friday, during early trading hours, was brought down to Rs 168.50 later in the day, after the CB intervened vigorously, pumping in US$, to halt the slide.
“This year US$ 400 million has gone out of Sri Lanka through the sale of government securities (by foreigners), while in 2017, it was an inflow of US$ 400 million,” noted CB Senior Deputy Governor Dr Nandalal Weerasinghe.
He said the rapid depreciation (of the LKR) was unsubstantiated, but based on exporters holding onto their export earnings (without bringing it back to Sri Lanka, anticipating a better rate later) while importers were booking exchange unusually early (when December season imports are normally booked in October-November) fearing the US$ to rise further.
“The fundamentals in the economy are reasonably good and there is no reason, apart from external factors, to see these changes where the US$ appears to be moving up by Re 1-Rs 1.50 per week,” he told the Sunday Times.
However, he said the Banking Regulator will intervene in the market if and when necessary, and also use other instruments such as increasing interest rates (only if and when necessary) to deter any unsubstantiated depreciation of the LKR. Increasing interest rates in government securities would encourage foreigners to keep their money here, other Bankers said.
The CB also brought in regulations during the week to restrict motor vehicle imports, which Dr. Weerasinghe said had seen a sharp rise due to pre-Budget purchases. The Budget is to be presented on November 5.
The money markets have played havoc over the past few days each day, hitting a national record in the parity rate of the US currency against the Rupee, with one dealer saying that “the future of the LKR against the US$ is anybody’s guess”.
The outflow of US$ from government securities- Bonds and Treasury bills- this year is, as a result of interest rates rising in the US. This has not only affected Sri Lanka but other emerging markets where US funds and US investors earlier flocked to park their money, because interest rates outside the US is much higher than in the US. The reverse is happening now.
Apart from that, the US-China trade war and rising oil prices has impacted on local currencies in several markets, in addition to Sri Lanka.
Dr. Weerasinghe said November-December should see an increase in inflows of remittances from Sri Lankans overseas, a tradition over the years for families to enjoy Christmas and the New Year. This, he said, could ease pressure on the LKR later.