ECONOMYNEXT – Sri Lanka’s central bank is not for a fixed exchange rate, but a much more ‘predictable’ regime, where investors can take positions, Central Bank Governor Nandalal Weerasinghe said.
“The exchange rate will have to be flexible, but not so volatile,” Governor Weerasinghe told local and foreign investors organized by the Colombo Stock Exchange.
“We don’t want an exchange rate going up and down on a daily or monthly basis, like we have in 2022.
“We need a much more predictable kind of exchange rate regime, which is competitive, which is in line with macro-fundamentals, and also people can take positions and take positions in terms of predictability.”
Sri Lanka has also seen current account surpluses, and the currency had appreciated in the recent past.
Sri Lanka has had a history of running large external current account deficits, Governor Weerasinghe said.
While current account deficits of 1 or 2 percent of GDP were manageable, deficits of 4 to 5 percent made it difficult to manage, he said.
This year the current account deficit could be ‘balanced’ or there could be a small ‘surplus’ he said.
Sri Lanka’s central bank has run deflationary policy, reducing domestic credit allowing large outflows through the financial account to build reserves, repay debt while private banks have also built reserves.
The central bank has also repaid debt to India and the IMF.
Bi-lateral lenders also stopped foreign funded projects after the default, stopping domestic capital expenditure and the attendant imports that come as a result of construction activity and salaries spent by workers.
While multilateral lenders continued to lend after the default, their repayments were also continued.
Sri Lanka is planning more government capex this year as bilateral loans are expected to resume with debt restructuring agreements being completed. To the extend the fiscal deficit is financed domestically, the external current account deficit will be smaller.
Sri Lanka usually runs large current account deficits by spending foreign borrowings, including through Sri Lanka Development Bonds financed through private bank credit lines or ISBS, by running down foreign reserves by sterilizing interventions or borrowing through swaps, analysts have said.
When forex shortages emerge the CPC also takes supplier credits, further financing current account deficits. (Colombo/Mar28/2025)
