In a telephone interview, Ajith Nivard Cabraal also tipped economic growth to pick up from next year, and expressed hopes that more Sri Lankan companies would follow the sovereign’s lead and tap the international bond markets for funding.
Having seen its reserves build to a record high of US$8.2 billion in 2011, the Central Bank of Sri Lanka in February decided to limit its intervention in the currency market as part of a wider package of policy measures to strengthen the external economy.
The dollar has appreciated by around 16% against the Sri Lankan rupee since the start of 2012. That is on top of a 3% devaluation of the Sri Lankan currency announced by the country’s government in November.
“We definitely see the rupee strengthening once the import demand has reduced as we have planned,” Mr. Cabraal said. “We feel confident that the adjustment will be a little more marked toward the latter part of the year.”
He said data were already showing a cooling in imports, following hikes in import duties and the imposition of a ceiling to the credit growth of banks.
Asked what a fair value for the currency would be, Mr. Cabraal said that would be up to the markets to decide.
On Tuesday, Sri Lanka sold a $1 billion dollar bond, in the country’s fifth international debt offering.
Hot on the heels of that deal, Sri Lankan firm People’s Leasing Co. Ltd. (PLC.SL) said it may sell a senior dollar bond after meetings with investors.
In April, state-owned Bank of Ceylon priced Sri Lanka’s first nonsovereign debt offering since 2004.
Mr. Cabraal said one of the reasons the sovereign had sold its bond was to encourage Sri Lankan corporates to also raise funds from the overseas markets.
“I think that strategy is now taking effect. Hopefully more top-quality companies of Sri Lanka are also coming into the international markets,” he said.
On plans for future sovereign issuance, Mr. Cabraal said there may be less demand for the government to borrow, going forward, given expectations for strong private investment in the country and the possibility of funding from public-private partnerships. He also highlighted the authorities’ determination to bring the debt-to-output level down to 60%.
The governor said the country was seeing quite strong investment, particularly in ports and its tourism industry.
Gross domestic product growth is likely to cool to around 7.2% in 2012, from 8.3% last year, he said. But he tipped it to pick up to about 8% from 2013, despite challenging global economic conditions.
Meanwhile, inflation should ease this month, after spiking in June due to the impact of drought on food prices and a recent hike in Sri Lankan oil prices. “We would probably see inflation tapering off toward the end of the year,” Mr. Cabraal added.
The balance of payments should also return to a positive position this year, he said, adding that current monetary policy settings appear to be appropriate.