Sri Lankan rupee depreciates 9.7-pct YTD; CB says observed stabilizing exchange rate

Oct 02, 2018 (LBO) – Recent measures are expected to ease the excessive demand for foreign currency and therefore the pressure in the domestic foreign exchange market as already observed in the stabilizing exchange rate, the Central Bank said releasing its monetary policy review. In line with several other peer countries such as India, Philippines, and Indonesia, the Sri Lankan rupee depreciated at a faster pace of 9.7 percent against the US dollar during the year up to 01 October 2018.

Central Bank says it intervened to curtail disorderly adjustment in the exchange rate during the first few weeks of September 2018. Central Bank and the government introduced a raft of policy measures including margin deposit requirements for letters of credit opened for the importation of personal motor vehicles.

The government also introduced cash margins on selected non-essential consumer goods imports and the suspension of concessionary vehicle permits for a limited period. “These measures are expected to ease the excessive demand for foreign currency and hence the pressure in the domestic foreign exchange market as already observed in the stabilizing exchange rate,” the Central Bank said. The deficit in the trade account continued to expand during the first seven months as import growth outpaced export growth. The substantial surge in import expenditure was driven by the growth in imports of fuel, gold and personal motor vehicles. “Even though services related inflows such as tourism performed notably and the financial account of the Balance of Payments (BOP) strengthened during the year, outflows of foreign investment from the government securities market exerted pressure on the BOP.” High import growth and capital outflows, in the context of a strengthening US dollar, exerted significant pressure on the exchange rate. Credit extended to the private sector continued to decelerate buttressing the moderation of broad money growth in August 2018.

Based on the data up to the first half of 2018, credit to all major sectors of the economy has expanded, indicating the availability of adequate financial resources to support economic activity.