Central Bank probes foreign exchange market transactions

The Sri Lankan rupee is on the verge of being stabilised following the intervention of the Central Bank (CB) in the domestic foreign exchange market to control the unexpected pressure and volatility on the rupee (against the US currency), Governor of the Bank Dr. Indrajit Coomaraswamy told a media conference convened to brief journalists on the third Monetary policy review in Colombo on Friday.

The rupee had lost ground stridently in late April and May after the CB resorted to money printing during the New Year festive period.

Dr. Coomaraswamy noted that they have spent US$ 136.5 million while purchasing $30 million to tackle the situation. On Thursday the rupee closed at a new low of 157.80/158.10.

He vowed to probe market transactions to get some insight on those activities with the aim of giving more flexibility to the foreign exchange market.

Export and import are the main factors that decide the exchange rate, only if it is allowed to float as per the market forces, supply and demand in the foreign exchange market.

Rupee depreciation is good for exports and bad for imports, he said adding that exports have maintained a positive momentum with export earnings growing during the first two months of 2018.

However, this was outweighed by the increase in import expenditure, largely driven by gold and vehicle imports, which resulted in a widening of the trade deficit, he said.

Export earnings grew by 16 per cent to $1.6 billion during the period of January to April this year while imports increased by 3.5 per cent to $2 billion during the same period.

According to the monthly Monetary Policy Review, core inflation remained subdued indicating contained demand pressures, while inflation expectations continued to decline.

However, a temporary uptick in inflation is expected in the short term due to the impact of upward price revisions to domestic petroleum products, LP gas and milk powder.

Nevertheless, with the dissipation of these transitory supply driven price pressures and further improvements in domestic food supplies, inflation is expected to stabilise in the desired mid-single digits in the second half of 2018.

Inflation is projected to remain within the 4-6 per cent target range over the medium term.

Referring to the resurrection of the Edirisinghe Trust Investment (ETI Finance) with the financial infusion of $ 73 million, Dr . Coomaraswamy said that the foreign investor has already remitted the first tranche of $43 million and the balance $30 million will be paid following the conclusion of legal matters relating to EAP Broadcasting Company Ltd.