The IMF yesterday highlighted the importance of Sri Lanka having a market-determined, flexible exchange rate.

In response to a Mirror Business query whether IMF would be advising the Central Bank to move away from its current guided exchange rate practice, IMF mission chief for Sri Lanka Masahiro Nozaki said restoring market-determined, flexible exchanger rate is an important pillar of the IMF programme.

“An important pillar of the programme is to restore a market-determined, flexible exchange rate. Transition to that is an important matter. We believe it needs to be sequenced appropriately,” he said.

The Central Bank in mid-May introduced a guided rupee/US dollar exchange rate to mitigate high volatility in the exchange rate when the rupee was allowed to depreciate since March.

With effect from May 13, the Central Bank introduced a middle rate based on the weighted average spot exchange rate of the US$/LKR interbank transactions, with a variation margin on either side of the middle spot exchange rate, for licensed banks.  

“This measure, among others, is expected to help strengthen the exchange rate, thereby easing liquidity pressures in the domestic foreign exchange market in the period ahead,” the Central Bank said.