The government has ended its dilly-dallying over seeking further assistance from the International Monetary Fund (IMF), just as the Sri Lanka rupee closed this week at more than Rs130 a US dollar, a near 20% depreciation since January.
It has agreed to take the final instalment of US$ 400 million (in July) of an ongoing loan. A decision on this would be taken after another review mission by the IMF, officials said. Earlier in the year, the Central Bank had been undecided on whether to accept the final (two) tranches of $400 million each, under the $2.6 billion Stand-By Arrangement as it was being disbursed at a higher 3% interest rate while the rest of the loan was given at little over 1%.
In a joint letter to the Fund, Deputy Finance and Planning Minister Gitanjana Gunawardena and Central Bank Governor Ajith Nivard Cabraal have said Sri Lanka will not revert to intervening in foreign exchange markets, unless absolutely necessary. The letter was released on Thursday by the IMF.
Sri Lanka has further sought an extension of the IMF package to July 23 from June to provide more time for the current flexible exchange rate policies to take root.
Forex dealers said the rupee ended weaker on Friday at Rs 130.20 levels from Rs 128 on the previous Friday, due to pressure from imports and possibly due
to the issuance of a Central Bank bond where foreigners were transferring their money to the bond (from other accounts). The dollar was around Rs. 110 in January.
Intervention in the markets by the Central Bank last year saw foreign exchange reserves fall to US$ 5.9 billion by December 2011 from US$ 8 billion in August. Last February, the Bank withdrew from the market allowing the dollar to float which has seen it rising from the Rs. 114 in February. In January the dollar rose to Rs. 114 from Rs. 110 when the government announced a 3% devaluation.
“We are firmly committed to a flexible monetary and exchange rate policy under which we will take whatever necessary steps that are needed to achieve these objectives,” said the March 15 letter, released by the IMF on Thursday along with its report on the 7th review mission which eventually led to the approval of a $400 million tranche.
“Since early February, we have limited Central Bank sales of foreign exchange to supporting the oil bill on a declining scale. This has sharply reduced the level of intervention in recent weeks and the corresponding decline in reserves.
More immediately, we expect to start rebuilding our net international reserves and aim, at least, to reverse the recent decline in net international reserves completely by end-2012. We are confident that the package of measures taken will reduce the external current account deficit towards a sustainable level by the end of 2012,”it said.
These documents were released on the eve of the annual meetings of the IMF and the World Bank currently underway in Washington. A Sri Lankan delegation led by Senior Minister Sarath Amunugama and including Mr. Cabraal is attending the meetings.
Government officials said these were routine annual meetings attended by finance ministers and central bank governors from all member countries and they were unlikely to raise any specific issues as far as Sri Lanka is concerned. “