11 March 2022 08:15 am
Clearing the confusion and uncertainty surrounding Monday’s Central Bank announcement on allowing a more flexible exchange rate and the behaviour of the domestic foreign exchange market in response to it, the Central Bank yesterday clearly indicated that it had allowed a free float.
The confusing signals coming from both the Central Bank and the Finance Ministry last two days kept currency dealers at bay and thus there was absence of trades above Rs.230 to a dollar, the rate at which the Central Bank devalued the rupee on Monday, which many interpreted as the new upper cap.
The telegraphic transfer rates issued by the Central Bank yesterday reaffirmed that it had floated the rupee as it sold dollars at Rs.259.99 and it bought dollars at Rs.249.96.
In the morning. the traders quoted rates at between Rs.260/275 to a dollar after Central Bank Governor Ajith Nivard Cabraal on Wednesday reconfirmed the floating of the currency to bank chiefs.
In any case, the move has been widely hailed by almost all stakeholders as it can effectively end the dollar shortage, which plagued the country’s economy for eight months since July last year.
Although there would be some near term hardships to people and businesses via spurt in their costs, the move would support greater stability and predictability in markets.
No more commodities shortages are expected, as dollars will be available at the exchange rate determined by the market forces and not by a dictum issued by the Central Bank.
According to economic analysts, the move will also help encourage inflows via exports, remittances and capital flows as the former two groups now get a better deal with higher predictability and flexibility while the latter will get clear signals that the authorities had floated the currency and thus there wouldn’t be concerns over their ability to repatriate capital whenever they need.
“It is great to see the arrival of some sanity into the markets and the Sri Lankan economy as a whole,” said one economic analyst Mirror Business talked to on the developments which took place since last Friday.
“However, this must be supplemented by the other reforms proposed by the Central Bank such as market pricing of utilities and reforming State-owned entities for higher productivity and end their reliance on the budget,” he added. However, he said Sri Lanka’s authorities have a nasty and entrenched practice of not clearly communicating what they do and making clear of their intentions to the public of their policy moves. “The widespread arrogance at all levels in the political authority under successive governments and the attitude of the bureaucrats has ruined the chances of people receiving or accessing information that helps everybody,” he added.
Meanwhile, it still remains unclear as to why the Finance Ministry on Wednesday evening proposed to pay an additional Rs.20 incentive for every migrant dollar as Avurudu bonus when the rupee is already floated which enables it to find its own value. It appears that there is a visible disconnect between the actions of the Central Bank and the Finance Ministry, which must be resolved very soon to provide clear guidance and clarity to the markets.
The Central Bank last Friday raised its key policy rates by 100 basis points to fend off inflationary pressures by containing the aggregate demand, as prices rose to a 13-year high in February. However, the monetary policy hawks are of the view that the Central Bank must raise its rates by another 100 basis points or more until they end the arbitrage opportunity available for bond traders and also to ensure real returns for those who depend on fixed incomes.