The Central Bank has continued to sell dollars to keep the rupee stable, but to a lesser degree than when it sold down US$ 3 billion from the reserves since June 2011 before it stopped intervention in February 2012.
The Central Bank earlier this year said it would not intervene in the foreign exchange market, unless there was a need to do so, with oil bill settlements taking place off market, as a slew of measures were introduced by the authorities to contain a balance of payments problem they wished would go away but did n’t.
Latest available data from the Central Bank shows that it had been a net seller of dollars totalling US$ 207.06 million in March and April.
"The greater flexibility in exchange rate has reduced the supply of foreign exchange by the Central Bank to the market significantly. On an average, the sale of foreign exchange has reduced from around US$ 500-600 million per month prior to the adjustment to below USS 200 million a month after the adjustment and below US$ 50 million in June 2012, reflecting that the (Central) bank’s intervention has been reduced," Treasury Secretary Dr. P. B. Jayasundera said yesterday.
The rupee closed flat with state bank dollar sales offsetting light importer demand on Wednesday (11).
"In the absence of any exporter selling US dollars, the rupee closed unchanged at Rs. 133.70-80 against the greenback from its opening level. Light importer demand saw the dollar trade at a high of Rs. 133.85. Support to the rupee was provided by a state name at Rs. 133.80," the Sri Lanka Forex Association said yesterday.
State banks are used by the Central Bank to intervene in the foreign exchange market.
The rupee depreciated sharply since February when the Central Bank stopped intervening in the market.
"These adjustments are not easy, neither politically nor economically. However, they have produced significant positive results," Dr. Jayasundera told a business forum yesterday.
"This has stabilized the country’s external reserves at around US$ 6 billion in spite of a continued higher out payments on oil imports. It is also important that since these adjustments Colombo Stock Exchange have experienced net foreign capital inflows.
"Second, the importations of motor vehicles have declined by about 40 percent since April 2012 and may likely to moderate further helping the Balance of Payments outcomes this year.
"Although, the moderation in the credit growth and associated high cost of finance is a cause for concern for growth prospects, considering the substantial benefits in terms of managing the demand and particularly the inflationary pressures, a modest sacrifice in terms of economic growth to around 7 percent from the earlier projected level of around 8 percent is viewed as justifiable move.
"The adjustments in fuel and electricity prices have contributed to contain the total loss of the Petroleum Corporation and Electricity Board. The recent moderation in global prices has improved the CPC performance. However, the impact of drought has reduced the hydro capacity in power generation resulting in a slight deviation in the CEB performance. The Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) together, however, have maintained the projected losses in spite of the exchange cost and the impact of the prevailing drought.
"The commitment of the Government to keep the Budget deficit at 6.2 percent of GDP will be realized by a greater concentration on revenue collections and expenditure commitment control on the Budget provisions.
"While, these measures will certainly be required to stabilize the economy in the immediate run, they will moderate the economic performance. So the growth rate is likely to moderate towards 7 percent in 2012. The flexibility in the exchange rate has helped exports and import replacement industries, but will reduce trade, banking, leasing, finance and to some extent constructions as their import content is high. The drought and its impact on agriculture and power generation too will reduce the value addition from these sectors. The Monetary policy strategies and supply side initiatives have targeted to keep inflation at single digit level though next few months it is like to be in upper single digit level," Dr. Jayasundera said.
Dr. Jayasundera said the balance of payments pressures was a result of post-conflict growth. The IMF recently called Sri Lanka a victim of high growth and that the policy measures taken to correct the situation would place Sri Lanka on a much more sustainable growth trajectory.