The decision to float the rupee was not one-sided – Cabraal – The Island


The decision to allow the Sri Lankan rupee to be flexible from 7 March 2022 was taken by the Central Bank’s Monetary Board, based on a Monetary Board document of the same date submitted by the three under -Governors, Director – Department of Economic Research and Director of the Department of International Operations, then-Governor Ajith Nivard Cabraal said in a press release yesterday. The three deputy governors are Mahinda Siriwardana, Dammika Nanayakkara and Y. Fernando.

Cabraal said the decision to allow the rupee to be flexible is sometimes described by some people as a “one-sided” decision he made. Therefore, he released this statement to provide the factual position to set the record straight, Cabraal said. of Sri Lanka, based on a Monetary Board document, dated March 7, 2022, submitted by the three Deputy Governors (Mr. Mahinda Siriwardene, Mr. Dammika Nanayakkara and Ms. Yvette Fernando), Director – Research Department Economic and Director – Department of International Operations. The Council document stressed the need for immediate changes in exchange rate policy, so that the exchange rate would act as a “shock absorber” in the face of adverse developments on the global front of Sri Lanka’s already fragile balance of payments, including including the rise in the price of crude oil to almost USD 140 a barrel and the escalation of the Russian-Ukrainian war.

“Based on this Board paper and the discussion at the meeting, the Monetary Board decided to ‘allow the market to have greater exchange rate flexibility with immediate effect and communicate that the Central Bank is of the view that foreign exchange transactions would take place at levels which do not exceed Rs. 230 per US dollar”. From the above, it is clear that, although the Monetary Board had expressed its “opinion” as to the level at which foreign exchange transactions would take place as a direction of the market, a clear decision had been made to allow the flexibility of the LKR in the foreign exchange market. On the same day, a statement was released to the media in accordance with the above decision.

Refer: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20220307_policy_package_
to_support_greater_macroeconomic_stability_e.pdf

“Furthermore, about a week after the LKR floated, the President officially announced that the government had entered into discussions with the International Monetary Fund (IMF) for a program.

“Subsequently, Governor Cabraal resigned on April 4, 2022, at which time the LKR was trading at Rs. 289.73/299.99 per USD in accordance with the new “flexible” exchange rate policy announced by the Board After the departure of Governor Cabraal, the Monetary Council, chaired by the new Governor, Dr Weerasinghe, continued the “flexible” exchange rate policy, while the government and the CBSL also took a series of decisions to far-reaching, including the following decisions: interest rates by 700 basis points from April 8, 2022, and to stop foreign exchange loan repayments and interest from April 12, 2022. In the meantime, the LKR continued to depreciate within a range of Rs. 364.23/377.50 against the USD as of May 12, 2022, when the Monetary Board had apparently once again decided to “fix” the exchange rate into a new range between Rs.355.00/Rs.365.00 per USD. Such decision to “fix” the exchange rate seems quite similar to the policy adopted by the Monetary Council chaired by the Governor, Professor WD Lakshman, which “fixed” the LKR exchange rate within a range of 199.00 Rs/203.00 per USD from 6 September 2021. .

“It must of course be understood that there will always be differing opinions among stakeholders as to the value, timing and methodology to be followed to ‘peg’, or ‘float’ or ‘peg’ a country’s currency. . It is also entirely possible that after decisions have been made to “float”, “peg” or “fix” the currency, others might argue that the decision was right or wrong or implemented differently. However, it should be understood that the decision-making authority must make its decision based on the prevailing circumstances, expert advice, practical field conditions, judgment of future expectations and results, etc., viewed holistically. . This is of course the reason why the Monetary Law Act gives the Monetary Board the power to change financial and monetary sector policies (including exchange rate policy, interest rates, reserve requirement rates , etc.) as it deems appropriate, from time to time. .

It should also be understood that the implementation of policy measures is carried out by the professional and technical staff of the Central Bank and they would naturally ensure that the policy measures implemented are based on legal and binding decisions of the Monetary Council , which is the decision-making authority, and not on the basis of “unilateral” decisions by one person.

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