Devaluation a “right step,” says IMF

Thursday, 24 November 2011 01:12 - - {{hitsCtrl.values.hits}}

The International Monetary Fund said on Wednesday that Sri Lanka’s devaluation of its currency was a “step in the right direction” that should favour export competitiveness and preserve foreign exchange reserves in the medium term.

The global lender’s comments come a day after Sri Lanka’s Central Bank implemented a three per cent devaluation of the rupee as ordered by President Mahinda Rajapaksa during his 2012 Budget presentation to Parliament on Monday.

Rajapaksa’s surprise announcement froze foreign exchange trading and represented a break from the Central Bank’s policy of using a trading band to smooth volatility.

“As others have noted, this was probably a non-traditional way of adjusting exchange rate policy, but we don’t want to get hung up on the form when the substance makes good sense,” Koshy Mathai, Sri Lanka’s IMF Country Representative, told Reuters via e-mail.

The IMF this year has urged the Central Bank to allow exchange rate flexibility. In September, it withheld the eighth loan tranche, saying State intervention in the foreign exchange market was unsustainable and a risk to non-borrowed reserves.

The Central Bank has spent more than $ 1 billion this year defending the rupee against depreciation, which hit many of Sri Lanka’s Asian peers. The Government argued the downward pressure was temporary and would be offset by inflows into the $ 50 billion economy.

Sri Lanka has been under a $ 2.6 billion IMF loan programme since July 2009, two months after it ended a 25-year civil war. Sri Lanka’s adherence to the global lender’s macroeconomic goals has helped investor confidence and its sovereign credit rating.

“Our initial impression is that the Budget also seems to be broadly consistent with the authorities’ earlier articulated plans, though we are continuing to study this complex document,” Mathai said.

The fund has paid out $ 1.8 billion to Sri Lanka so far.

By 0519 GMT, the rupee was trading at 114.19/20 as the Central Bank increased and widened the dollar trading band to 113.60/114.20 from Tuesday’s 113.50/90. It has fallen 3.33 per cent since the devaluation took effect.

Sri Lanka’s Minister for International Monetary Cooperation said the decision to devalue versus a gradual depreciation was made as a matter of policy, not to satisfy the IMF.

“IMF concerns are not our priority. Sri Lankan concerns are our priority,” Dr. Sarath Amunugama told Reuters. “The devaluation was just because of the strong request from the exporters and to protect the local production.”

Amunugama said that though the country did not need the IMF money anymore, it would continue the loan as the terms were concessional. The next IMF mission is due back in Colombo in late January, Mathai said.