Sri Lankan rupee peg ‘devalued’ to 203 per US dollar, sharp discounts

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ECONOMYNEXT – An unreliable Sri Lankan rupee peg devalued to 203 against the US dollar from 202 earlier as banks offered dollars at the new rate to customers as the currency came under pressure from cash injections .

Sri Lankan banks were first barred from selling or buying dollars at 199.90 to the US dollar on May 3, with banks depositing Rs 161 billion in liquidity into the central bank’s excess liquidity window , which represents a potential pressure of about 800 million US dollars.

The non-credible peg was then devalued to 202 per US dollar.

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Despite a steady weakening of the exchange rate, there are term discounts. This week, the spot / one-year deal was struck at a discount of 17 rupees, market participants said, implying around 83 rupees for one year in dollars as domestic dollar yields rise.

Sri Lanka’s hard peg with the US dollar lost credibility in 1950 when a central bank money printing was created by a Federal Reserve physician in the style of several set up in Latin America by the agency since the days of the Great Depression.

When the peg lost its credibility with the onset of liquidity injections, which resulted in balance of payments deficits, the rupee was at 4.70 per US dollar.

Until the 1967 sterling crisis, the peg was maintained with currency and trade controls. Until then, the parity between the US dollar and the British pound was also set because the two central banks were supposed to target gold under the Bretton Woods system.

Sri Lanka’s central bank was to target gold at 2.88 grains. The US dollar was to target gold at $ 35 an ounce.

However, due to monetary policy focused on the output gap – now known as the “stimulus” – the US dollar also collapsed in 1971, leading to a system of floating exchange rates.

The Sri Lankan rupee has so far collapsed from 4.70 levels at the time of independence to 203 as long as the currency was printed (central bank credit) to maintain interest rates on the decline and increase bank loans. (Colombo / May 18/2021)



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