Sri Lanka does not look at real effective exchange rate: CB Governor

ECONOMYNEXT – Sri Lanka does not look at the real effective exchange rate, but allows the rupee to move on demand and supply, based on the flexible inflation targeting framework, Central Bank Governor Nandalal Weerasinghe said.

Sri Lanka’s rupee had been allowed to appreciate from March 2023, amid deflationary monetary policy, in contrast to earlier stabilization programs, where the depreciated rupee has been prevented from strengthening despite and reserves were collected only at the depreciated rate.

“We do not look at the real effective exchange rate,” Governor Weerasinghe said. “This is market driven, demand and supply.”

“These days there is a lot of supply, as a result we have been building our position.”

“The exchange rate is determined, mostly based on the market, short term demand and supply. And long term mainly on market fundamentals, current account deficit. And the long term is mainly market fundamentals, the current account deficit.

“Last year we had a current account deficit. Last year the current account was a surplus. This year we also expect a  smaller surplus than last year.

‘So I do not expect a lot of pressure on market conditions.”

The central bank has collected reserves and the government has also repaid loans to multilateral lenders amid lower domestic private credit. Private banks had also built-up dollar positions or repaid credit lines.

The central bank is also repaying loans including to India.

Governor Weerasinghe said he did not want to comment on exchange rate predictions made by various persons.

“There are always projections, that is ok,” Governor Weerasinghe said. “The exchange determination is as we announced under the flexible inflation targeting regime. It is a market driven exchange rate. There is no exchange rate target.”

Related Sri Lanka rupee expected to reach 280 to US dollar by June: President

Econometricians have devised various statistical methods through which exchange rates can be shown to be simultaneously ‘overvalued’ (based on REER) and ‘undervalued’ (IMF’s EBA-lite for example).

Based on published central bank REER data, the rupee is now sharply below 100.

Some of the models to calculate ‘equilibrium’ exchange rates were developed from around 1970 as Western central banks also lost a credible anchor for their operating framework, and money lost a fundamental attribute of being a store of value, analysts say. (Colombo/Mar27/2028)