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Dollar hits Rs. 140 mark; IMF welcomes move
View(s):The recent ‘free float’ of the rupee against the US dollar and other currencies was on Friday welcomed by a visiting mission from the International Monetary Fund (IMF) which also urged Sri Lanka’s Central Bank (CB) to further relax foreign currency controls.
The CB move earlier this month has helped exporters but saw an escalation of prices in some imports, mainly vehicles, for which prices have moved by a minimum Rs. 100,000-200,000 a unit. The dollar hit Rs.140-141 this week from the Rs. 132-133 range during the ‘controlled float’.
The regulator has pumped in more than a billion dollars in the past few months to protect the rupee from sliding but this has eaten into foreign exchange reserves (includes export earnings) as imports, on a wave of consumerism particularly the acquisition of small cars, surged. Last week, to stem the flow of new vehicles, the CB ordered that vehicle leasing facilities be restricted to a maximum of 70 per cent against 100 per cent of the vehicle value given earlier.
“The mission welcomes the CB’s recent decision to cease setting daily spot prices for the rupee and let market forces play a greater role in determining the exchange rate. Moving ahead, the commitment to exchange rate flexibility should continue in order to maintain competitiveness and facilitate an increase in CBSL foreign exchange reserves,” the IMF delegation said in a media statement.
The IMF mission delegation led by Todd Schneider visited Colombo from September 8-18 to conduct Post-Programme Monitoring discussions based on the last IMF facility which ended in 2012. The new Sri Lankan Government is said to be considering requesting another $1billion facility.
It said increase in consumer spending created by the sharp rise in public wages and salaries has also contributed to a sizeable increase in imports of consumption and other goods —more than offsetting savings from lower oil prices. The resulting deterioration in the non-oil trade balance has contributed to persistent downward pressure on Central Bank foreign exchange reserves during the first eight months of the year.
“Headline inflation is currently near zero but is expected to end the year around 3 per cent. Core inflation has risen steadily since the beginning of the year, consistent with higher demand for domestic non-tradables and a gradual reduction in economic slack. Risks to outlook are tilted to the downside with more volatile external financing conditions resulting from the expected monetary policy tightening in the U.S. and uncertainties over growth prospects in emerging markets,” the IMF said.
The delegation said it found the overall financial system stable and current monetary stance appropriate. It recommended “vigilance given rising core inflation, the resurgence of private credit, and signs of receding slack in the economy. In this context, a tightening bias appears prudent”.
The delegation emphasised the need to eliminate tax expenditures (exemptions, tax holidays and reduced rates) as the most important component in a strategy to make the tax system simple, fair, and efficient. It said, “Putting state firms on a commercial footing, allowing them to make market-based financial decisions (including pricing) and subjecting them to the greater financial discipline will also help to reduce risks to the budget and the financial system”.