Sri Lanka busts US$250mn to prop up exchange rate

Sept 17, 2007 (LBO) – Sri Lanka has spent more than 200 million US dollars to prop up the rupee during the past four months in an intervention campaign analysts say helped worsen exchange and demand pressure. There are fears among some market analysts, that if the bond price is manipulated it will give opportunities for foreign bond holders to hit Sri Lanka's pension funds. In August alone when intervention was at its heaviest the bank had busted up 105.6 million dollars to prop up the exchange rate, the latest data shows.

In July the bank spent 50 million dollars and in June 29.9 million on a net basis, totaling 197.2 million spent for the quarter.

In May when the balance of payments started to turn negative the bank had spent another 50.6 million dollars, clocking up 247.5 million dollars since April when reserve money shot to 277 billion rupees and money printing resumed.

Though currency defence in May was in the backdrop of a falling reserve money number, in later months the bank printed money to maintain reserve money in a dangerous practice known as sterilized intervention.

In late August the Central Bank stopped heavy moral suasion and gave up defending the rupee, allowing the market