Cartoon in the Island entitled 'Dollar punches rupee'

An International Monetary Fund is expected in Colombo today as the Central Bank, again, promised not to intervene in the currency markets to support the value of the Sri Lankan rupee.

The rupee settled this week at a level of about 131 / 132 to the US dollar, having steadily fallen from a level of about 109/ 110 late last year. (See chart here for rupee’s decline). The Central Bank had attempted to halt this decline by selling off its reserves of dollars, spending US $ 2.6 billion in the five months from August last year.

It was eventually forced to abandon this policy because the money ran out and the IMF refused to release a US $ 400 million loan instalment until Sri Lanka allowed the rupee to fall to its natural level. Sri Lanka is now seeking the final US $ 420 million of an IMF loan agreed in June 2009.

The rising price of essential commodities, caused by the falling value of the rupee, has led to protests by consumers and strikes by public sector workers demanding higher wages. The Central Bank sought to calm fears this week that the Rupee would not slide further.

See: Prices rise as Mahinda Economics unwinds (16 Feb 2012)

The Central Bank’s chief economist, Swarna Gunaratna, was quoted by Reuters as stating this week,

"Even without intervening, the exchange rate has stabilised around 130-131. We don't think that it will go to the 140 or 150 level. It will remain at these levels even without intervening."

However, reports in the Sunday Times this week suggested that the Central Bank was still covertly selling dollars through the state owned People’s Bank.

See our earlier discussion on the increasing politicisation of the banking sector here.