• Depreciation to restore current account surplus

The International Monetary Fund (IMF) macro-framework on Sri Lanka expects a real depreciation of the Sri Lankan rupee over the medium term, which will help the country to restore current account surplus through increased export competitiveness, Sri Lankan authorities told creditors.

According to the Q&A session report of the Creditor Presentation held in March as released by the Ministry of Finance, the Sri Lankan Authorities had said the IMF programme expects a real depreciation of the rupee which will help restore an external current account surplus (non-interest) as the country should benefit from increased export competitiveness, a necessary step toward rebuilding reserves. 

“The real exchange rate path, like all other forecasts included in the IMF macro-framework, will be reassessed during each IMF programme review,” the report said.

During the first three months of 2023, the Central Bank has been able to purchase over $ 950 million on a net basis towards building up reserves, while the rupee appreciated by around 11% against the US dollar during the same period due to improving market sentiments in anticipation of the Executive Board approval of the Extended Fund Facility (EFF). 

In March, Fitch Ratings said that its forecast for the rupee to weaken to a record low of Rs. 390 per US dollar by the end of 2023 as external debt repayment needs and will need to build up its foreign reserve buffer over the coming months would put downside pressure on the exchange rate.

State Minister Shehan Semasinghe in an interview with Derana TV on Monday (8) said that Sri Lanka will also have to present an acceptable programme to the IMF to lift the import restriction in the next two-three months, which will also cause the depreciation of the rupee further.

Under the EFF, Sri Lanka has a target on Net Official International Reserves (NIR), predicated on the CBSL’s outright foreign exchange purchases on a net basis of $1.4 billion in 2023, “To avoid an ‘on and off’ approach to exchange rate flexibility and to allow the rupee to adjust to changing fundamentals, (i) foreign exchange interventions should be limited to truly disorderly market conditions, (ii) transparently disclosed to guide market expectations, and (iii) capped at an amount consistent with meeting the NIR targets,” the staff report by the IMF said.

The US dollar has been hovering between the Rs 318-322 range since the beginning of May.