Sri Lankan rupee forwards recoup losses to end steady on bank dollar sales

COLOMBO: Sri Lankan rupee forwards ended steady on Wednesday, recouping some early losses as late dollar sales by banks offset early importer demand for the greenback, dealers said.

However, they said, growing uncertainty after the government said it would impose fresh taxes in a move that would enable the country to qualify for an IMF loan weighed on the currency.

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. One-week rupee forwards, which act as a proxy for the spot currency, traded at a low of 145.35 per dollar during the day, but ended steady at 145.15/20 per dollar.

The spot currency did not trade below 143.90, seen as the central bank's desired level.

"The demand was there in the morning, but we have seen some banks selling dollars in the latter part of the day," said a currency dealer, asking not to be named.

Dealers also said policy uncertainty is deepening with the new taxes and the capital gains tax may discourage foreign investors. 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.

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 2.89 billion rupees ($20.00 million) of surplus liquidity on Wednesday, using the central bank's deposit facility at 6.50 percent, while it borrowed 6.255 billion rupees using the central bank's lending facility at 8.00 percent, official data showed.