The central bank of Sri Lanka has lowered the rupee by up to 15 per cent, taking one of several steps that analysts said are needed to get a Monetary Fund IMF loan programme that will boost currency reserves and help negotiate debt restructuring.
The Central Bank of Sri Lanka set an exchange rate limit of 230 rupees per dollar, compared to the 200 to 203 limit that had prevailed since October.
As a result of the COVID-19 epidemic, analysts said that the depreciation was likely to encourage remittances, a major source of foreign exchange in Sri Lanka.
Sri Lanka's foreign reserves fell to US $2.36 billion at the end of January and it is due to repay about US $4 billion in debt in the rest of 2022, making it likely that government will seek international aid from the International Monetary Fund.
Sri Lanka has not formally sought talks on an IMF programme, an official said, declining to be named.
Cabinet spokesman and media minister Dullas Allahaperuma said on Tuesday that they believe this will support growth and help us face external challenges better. He did not say whether the government would approach the IMF.
Thilina Panduwawala, head of economic research at Frontier Research said that currency flexibility is something IMF will see as a precondition for a programme, making it easier for future negotiations with them.
Without clear communication on intention for debt restructuring and the International Monetary Fund, it does not mean much right now. The government needs to take additional policy steps, including increasing taxes to shore up public revenues and adjusting fuel prices, because of the devaluation, according to analysts.
The exchange rate correction and the recent 100 bps increase in key policy rates are the stepping stones for the country to move towards an IMF-led restructuring programme, Asia Securities said in its latest Macro Outlook update.
We continue to factor a restructuring during the year due to the relatively unsustainable level of debt outlined by the IMF during its recent Article IV assessment. Some analysts said the central bank should have depreciated by more to boost remittances significantly, and some analysts said that there would be a bigger devaluation of up to 25 per cent later in the year.
According to market sources, the rate of Hawala traders, who transfer funds without physically moving money, has been lowered to 270 rupees per dollar after CBSL announced it has previously been offered a rate of around 255 rupees.
Umesh Moramudali, an economist at the University of Colombo, said the exchange rate limit should have been set at around 250 to 260 rupees per dollar to bring in more remittances.
This move could help exporters but it is too little for migrant workers who are now used to higher curb rates and are unlikely to shift to bank rates, Moramudali said.
CBSL called on the government to incentivize remittances and foreign investments in its latest monetary policy announcement.
In December, CBSL announced a number of measures including giving an additional 10 rupees per dollar as an incentive, but this had little impact with deposits dropping 61.6 per cent in January to US $259 million from US $675 million a year earlier.