Ceylon chamber cheers CB plans to reduce forex market intervention

The Central Bank (CB)’s decision to avoid, as far as possible, intervention in the foreign exchange markets has been welcomed by Sri Lanka's main business chamber.

In a media statement on Thursday, the Ceylon Chamber of Commerce (CCC) said the CB’s ‘Road map 2017’ has announced an important shift in thinking with regard to exchange rate management, from that seen in the past.

“The CCC supports the CBSL’s view that there should be greater flexibility in the rupee; for it to be determined by market forces but guarded against adverse speculation. The CCC agrees with the Governor’s assertion that the strategy followed in the past of intervening in currency markets by using valuable international reserves is not sustainable. Not only had this strategy led to a severe depletion of reserves, but the overvaluation of the rupee hurt the competitiveness of our exports,” the chamber said.

On Tuesday, CB Governor Indrajit Coomaraswamy told reporters that Sri Lanka cannot afford to continuously defend an exchange rate against the rupee and in the process, spend much needed forex reserves.

The CCC however said it recognised the need for the Government to consider the impact of a flexible rupee on imports of essential items. Cost of living concerns stemming from this should be tackled without resorting to an artificial defense of the rupee, it said.

In a detailed statement, the chamber said the ‘Road map 2017’ provides an encouraging outlook for the Sri Lankan business community.

It has announced a shift in monetary policy making, towards a flexible inflation-targeting framework away from the current money supply targeting framework. This will be a progressive and ambitious shift, but would need to be implemented over time. Throughout Sri Lanka’s post-independence history, the dominance of fiscal imbalances in Sri Lanka has made independent and stable monetary policymaking challenging. As new research has shown, weak fiscal management can derail an inflation-targeting regime, and hurt the credibility of a monetary authority, the chamber said.

“The moves to establish an independent public debt office or vest it within the Ministry of Finance can play a strong role in further strengthening Central Bank independence, as the current conflict of interest faced by the CB between being the banker to the government as well as managing interest rates needs to be resolved,” it said.

The chamber welcomed the efforts by the Governor and his team to place stronger emphasis on advanced analytics and forecasting tools to continually enrich monetary policy decision-making. Furthermore, steps being planned by the institution, as the banking regulator, to enhance supervision and early detection of risks, will support Sri Lanka’s ambitions of becoming a trusted and stable regional business centre.