Sri Lankan rupee forwards down on importer dollar demand, tax woes

COLOMBO: Sri Lankan rupee forwards ended weaker on Tuesday on importer dollar demand and growing policy uncertainty after the government said it would impose fresh taxes in a move that would enable the country to qualify for an IMF loan.

Sri Lanka will raise value added tax (VAT) and reintroduce capital gains tax to break out of a debt trap, Prime Minister Ranil Wickremesinghe said on Tuesday, ahead of talks on a $1.5-billion loan it is seeking from the IMF. The new tax moves come a week after Fitch's downgrade of Sri Lanka's sovereign rating, and some dealers said the rupee would face further downward pressure due to seasonal importer demand.

Finance Minister Ravi Karunanayake and Central Bank Governor Arjuna Mahendran, however, said the downgrade will not impact the country's borrowing.

One-week rupee forwards, which act as a proxy for the spot currency, ended at 145.15/20 per dollar, weaker from Friday's close of 145.05/15.

The markets were closed on Monday. The spot currency did not trade below 143.90, seen as the central bank's desired level. "Importers are rushing in to buy forwards after the new taxes," said a currency dealer asking not to be named.

"The policy uncertainty is deepening and with the new taxes, it might impact foreign investors," he said adding the capital gains tax may discourage foreign investors.

The downgrade will be of concern to international investors and market players, analysts said, adding it would push up the cost of government borrowings in the international market, putting pressure on the rupee.

Foreign investors sold 961 million rupees ($6.7 million) worth of government securities in the week ended March 2, data from the central bank showed, taking the total offloaded since Dec. 30 to 35.9 billion rupees.

Commercial banks parked 9.093 billion rupees ($72.06 million) of surplus liquidity on Tuesday, using the central bank's deposit facility at 6.50 percent, while it borrowed 4.4 billion rupees using the central bank's lending facility at 8.00 percent, official data showed.