COLOMBO Sri Lanka's Central Bank Monday announced a two percent depreciation in the rupee currency against the U.S. dollar as the country's foreign reserves dwindled rapidly.
The bank announced it would widen from six to eight percent, as a proportion of the buying price, the difference between the buying and selling rate for the dollar. As the Central Bank move was announced, the commercial bank selling rates of the dollar jumped from Friday's close of 81.36 to 83.02 by midday Monday, AFP reported. Central Bank Governor A.S. Jayawardena said he expected the rupee to settle at around 81 and 82 to the dollar.
He argued that high interest rates of 28 percent would encourage the exchange rate to stabilize as there was a demand in the market for rupee funds.
The move was the third time in six months the bank had intervened in the foreign exchange market as the country's foreign reserves fell due to heavy spending on arms and ammunition to fight Tamil Tiger rebels in the island's north. Bank figures showed foreign reserves had fallen by 27.3 percent at the end of September compared to the beginning of the year. However, the bank's Deputy Governor W.A. Wijewardena painted a rosy picture of the economy despite the defense spending and a higher import bill to finance petroleum imports.
"We are very close to a free float system (of the exchange rate)," Wijewardena said. "We will be able to move into a complete free float in the next six to 12 months. "We are gradually giving the freedom to the market to determine the rates."