Mr. Ajith Nivard Cabraal, two-time Governor of the Central Bank and former Minister of State for Finance, issued the following statement to the media last week on exchange rate flexibility.
“The decision to allow the Sri Lankan Rupee (LKR) to be ‘flexible’ from March 7, 2022 is sometimes described by some people as a ‘unilateral’ decision by then-Governor Ajith Nivard Cabraal. Therefore, this statement aims to provide the factual position in order to set the record straight.” The decision to allow exchange rate flexibility was taken by the Monetary Board of the Central Bank 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 – Economic Research Department and Director – International Operations Department .
“The Council paper 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 increase in the price of crude oil to almost 140 USD per barrel and the worsening 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 Council expressed its “view” on the level at which foreign exchange transactions would take place as a direction of the market, a clear decision had been made to allow flexibility for the LKR in the forex market.On the same day, a statement was released to the media in accordance with the above decision.
“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 major decisions. scope, in particular the following decisions: to increase key interest rates sharply by 700 basis points from April 8, 2022, and to stop repayments of foreign exchange loans and interest from April 12, 2022.
“Meanwhile, the LKR continued to depreciate to a range of Rs. “fix” the exchange rate in a new range between Rs.355.00/Rs.365.00 per USD Such a decision to “fix” the exchange rate seems quite similar to the policy adopted by the Monetary Council chaired by the Governor, the Professor WD Lakshman, who “fixed” the LKR exchange rate within a range of Rs 199.00/203.00 per USD from 6 September 2021. From.
“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 their decision based on the prevailing circumstances, expert advice, practical field conditions, judgment of future expectations and results, etc. when seen This is obviously 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 ratio, 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 Board monetary, which is the decision-making authority, and not based on the “unilateral” decisions of a single person.