The International Monetary Fund urged Sri Lanka on Wednesday to limit its intervention in foreign exchange markets to curbing excessive short-term volatility, while emphasising the need for exchange rate flexibility. The IMF, which ended a $2.6 billion loan programme to Sri Lanka in 2012, estimated the island's economy grew by 7.4 percent in 2014 and said momentum could pick up to 6-7 percent in 2015.
"We highlighted the need for a cushion of foreign exchange reserves and in this context emphasised the need for exchange rate flexibility," said Todd Schneider, the mission head of the IMF's post-aid program. "Intervention should be limited to dealing with excessive short-term volatility. The exchange rate does not appear out of line with fundamentals, particularly given the projected improvement in the balance of payment."
The central bank repaid a $500 million sovereign bond from its reserves soon after the January 8 presidential polls. However, that along with some other debt repayments depleted the country's foreign currency reserves by more than $1 billion in January alone, when they fell 13.2 percent to $6.28 billion. That put pressure on the rupee currency, resulting in a 1.2 percent fall against the dollar in January.
Since the end of the IMF loan disbursement, the $76 billion economy has not slipped from the broadly agreed macroeconomic framework with the global lender in terms of reducing debt and the fiscal deficit and maintaining lower inflation. However, the IMF has raised concerns time to time about Sri Lanka's monetary, fiscal and foreign exchange policies.