IMF suggests exchange rate flexibility for Sri Lanka

The International Monetary Fund (IMF), responding to criticism over the rapid depreciation of the rupee against the US dollar, says Sri Lanka is not alone in this crisis.

Ms. Manuela Goretti, IMF Mission Chief for Sri Lanka, in an email response to questions posed by the Business Times, noted that Sri Lanka is currently facing external market pressures with the strengthening of the U.S. dollar, along with many other emerging markets. In response, several emerging markets have let their currency depreciate and tightened their monetary policy.

The rupee has depreciated at a faster pace of 9.7 per cent against the US dollar this year till October 1.

She said the IMF recommends a strong policy mix to strengthen the resilience of the Sri Lankan economy to shocks. In this context, continued progress with rev- enue- based fiscal consolidation and structural reforms is critical to tackle Sri Lanka’s vulnerabilities, notably high public debt and refinancing needs, supporting investors’ confidence, she said.

The Central Bank (CB) should maintain a prudent monetary stance and stand ready to tighten it if inflationary pressures were to resume or capital outflows intensify, while exchange rate flexibility should be the first line of defense against volatile global market conditions, she advised.

Replying to a question as to whether the IMF has exerted sustained pressure on the CB to stop intervening in the currency markets, she explained that Sri Lanka’s external position is broadly consistent with fundamentals and desirable policy settings, although it remains vulnerable to shocks amid rising volatility in emerging markets.

Ms. Goretti said the exchange rate should be market-determined and respond to external pressures, with intervention limited to stem disorderly market conditions to safeguard reserve buffers.

Shielding vulnerable families from the negative impact of fiscal consolidation would also require broadening the coverage of social safety nets based on well- defined means- tested criteria, she said. (BS)

Ms. Goretti said the exchange rate should be market-determined and respond to external pressures, with intervention limited to stem disorderly market conditions to safeguard reserve buffers