IMF loan: CB to prevent sharp rupee gains

The Central Bank (CB) says it will intervene in foreign exchange markets to stabilise the rupee in the wake of the US$ 2.6 billion IMF loan which will trigger US dollar inflows causing sudden sharp appreciations of the rupee against the dollar, making it unfavourable for exporters.

The rupee has at this point stabilised at around Rs 115.00 per US dollar. “The rupee could appreciate following the IMF loan. But we will try to prevent sudden sharp appreciations of the rupee. Since 2008, the Central Bank has been intervening in the foreign exchange markets to prevent sudden, sharp, exchange rate swings, to provide stability,” CB Director of the Economic Research, Dr P. N. Weerasinghe, told the Sunday Times FT.

The CB says exchange rate volatility will not be due to inflows of IMF dollars but owing to other dollar inflows, triggered by the IMF loan. These inflows will come on top of increasing inward remittances. It says the IMF dollars will not cause sudden exchange rate swings because the funds will not come into the domestic market. Instead they will be reinvested outside the country, as national foreign exchange reserves. However, the growth in reserves will signal to foreign investors and traders that the country has enough foreign exchange to pay them in foreign currency. This is expected to reduce risk and increase confidence in Sri Lanka for investors and others.

“The IMF money will boost foreign exchange reserves. So it will increase confidence in the country’s ability to meet external obligations. So more dollars will come into the country from investors and other parties because of increased confidence. These inflows can cause the rupee to appreciate,” said Dr Weerasinghe.

“But at such times the Central Bank will absorb the excess, to stabilise the rupee within a reasonable range. The excess dollars absorbed by the Central Bank will also go into the national foreign exchange reserves,” he said. The CB is targeting a build up of 3.5 months of foreign exchange reserves, or about US$ 3.5 billion, supported mainly by IMF inflows.