Sri Lanka’s rupee is set to decline and lose almost a fourth of its value against the dollar by end-2023, according to. Bloomberg report.
“Authorities have to remain committed to enacting tough reforms to stay on track with the IMF program. This might be politically challenging against the backdrop of a weakening economy and a local election likely on the horizon
The rupee is to weaken about 25%-23% to a record low of Rs.390 per dollar by year-end. The rupee advanced 0.5% to 316.8 per dollar on Thursday, taking its annual gain to 14%.
That’s after the IMF said it will decide on a $2.9 billion bailout for Sri Lanka on March 20 following China’s assurance that it will support the nation’s debt restructuring.
It has been predicted the rupee will rise further to 309 per dollar on last Thursday. Sri Lanka has increased taxes, cut energy subsidies and loosened its grip on the currency to secure the IMF loan.
The central bank recently lifted borrowing costs further to ensure that inflation which has slowed from nearly 70% doesn’t flare up.
“Sri Lanka still has significant external debt repayment needs and will need to build up its foreign reserve buffer over the coming months, which would put downside pressure on the exchange rate,” Bloomberg reported.
Sri Lanka needs further rate hike to contain monetary expansion and put the brakes on inflation but a rate hike is will also help support the rupee, W A Wijewardena, former Deputy Governor of the central bank said.
An overall plan covering interest rates, exchange rates, and the budget was needed.“We have to raise rates to contain the rising inflation in the country,” Wijewardene said.
“But it has a positive effect on the exchange rate. One reason very high demand for imports is the money available. The high aggregate demand is driving imports.”
Wijewardene said the 200 rate was could not be held and the day of reckoning had come.
He said the 7.50 policy rate was not enough because the Treasury bill yields have already gone above 10 percent.
Sri Lanka’s Central Bank’s intervention with dollar buying has prevented sharp appreciation of the rupee, dealers say, as the rupee is under upward pressure amid negative credit and the lifting of a surrender rule.
The rupee is trading between Rs 312-318 against the US dollar compared to Rs.360 level a week ago, showing a near 15 percent rise.
The sharp appreciation comes amid speculation over dollar inflows from International Financial Corporation amounting to US$400 million into three private banks and further inflows soon after the International Monetary Fund (IMF) Executive Board approval of a $2.9 billion loan later this month.