CB justifies its forex action

The Central Bank yesterday justified and defended its management of the country’s foreign exchange dynamics after the IMF raised some concerns.  

The IMF in a statement on Wednesday at the conclusion of its staff mission said Sri Lanka’s foreign exchange reserves had steadily declined following foreign exchange sales by the Central Bank. “This policy does not seem to be in line with the current fundamentals of the economy.

In response to market pressures, the Central Bank should henceforth limit its intervention and allow more exchange rate flexibility,” the IMF said. It also said flexibility in exchange rates which had appreciated substantially over the past two years is also an essential component in ensuring Sri Lanka’s export competitiveness.”

However the Central Bank in a statement said it was of the view that policy on exchange rate is appropriate and will continue to follow such prudent policy. It said that the current reserves are at a  historically high level and significant inflows of foreign exchange are forthcoming. The bank also said it intervenes in both sides of the forex market to maintain stability whilst allowing adequate flexibility.  

Following is the full text of the Central Bank statement: Central Bank’s attention has been drawn on certain reports that appeared in some newspapers on 8 September 2011, which were based on a press conference and a press statement issued by the IMF - SBA mission that concluded their review this week.

            

The mission has commended the significant macroeconomic achievements and stability of the economy and has indicated the need for more flexibility in the exchange rate with limited intervention by the Central Bank.

The Central Bank wishes to emphasise that the gross official reserves of CBSL has now reached the historically highest level of US dollars 8.1 billion, substantially above the desired levels and sufficient to cover 5.8 months of imports. The exchange rate policy of the Central Bank has been consistent where Central Bank intervenes in both sides of the market to maintain stability while also allowing adequate flexibility. So far during the year, the rupee has marginally appreciated against the US dollar and has depreciated against other major currencies; at rates of 4.7 per cent against Euro, 3.2 per cent against Pound Sterling; and 5.0 per cent against Yen. During July and August 2011 the Central Bank had to intervene in the foreign exchange market as there were some pressure mainly to absorb the proceeds of the sovereign bond of US dollars 1.0 billion and to ease some pressure attributable to significant increase in import demand particularly in the backdrop of increased oil imports.

Going forward, it is evident that significant inflows of foreign exchange are forthcoming on account of investments in various projects including in the areas of tourism, ports, and telecommunications, manufacturing and assembling industries as well as to the debt and equity markets. Inflows to the government to finance various infrastructure projects are continuing. Foreign remittance inflows as well as inflows to the services account, which includes earnings from tourism, port and airport services, continue to be strong. At the same time several commercial banks have also indicated that they would raise their Tier 2 capital and a part of that would come from foreign sources. These will lead to substantial increases in foreign exchange liquidity in the market.

Hence the Central Bank is of the view that its policy on exchange rate is appropriate in the circumstances and will continue to follow such prudent policy.