Currency free float inflates external debt by 50% to Rs. 9.5t
- New Debate on the Merits of a Sudden Rupee Float
- Govt. debt exceeds Rs. 20 b mark at Rs. 21.7 t end of March from Rs. 17.6 tons
- The share of external debt is 44%; at the current exchange rate, the figure is $26.5 billion
By Nisthar Cassim
The rupee value of the country’s external debt swelled by almost 50% in the first quarter to Rs. 9.55 trillion following the currency’s sudden free float, the latest data from the Central Bank reveals.
Sri Lanka ended 2021 with an external debt of Rs. 6.5 trillion and by February this year it had fallen to Rs. 6.4 trillion.
In a hotly contested decision, the government suddenly decided in the first week of March to let the stock market float freely, plunging the rupee by more than 50%. This caused the external debt to swell by nearly 40% to Rs. 9.54 trillion (about $2.65 trillion at the current exchange rate).
The total outstanding debt has increased from Rs. 17.6 trillion by the end of 2021 to Rs. 21.7 trillion by March this year. The external debt component was about 44%. The government suspended repayment of all external debt as of April 12.
The sudden floating of the currency after artificial management for six months has come under renewed criticism. The doubling of key rates that followed fueled the debate. According to some analysts, the double move without safeguards or stabilization measures has only aggravated the economic crisis rather than bringing stability.
Current CBSL Governor Dr Nandalal Weerasinghe criticized the sequencing of some of the measures by his predecessor and some degree of damage control was needed. Then CBSL Governor Nivard Cabraal hedged that the new regime had been pursuing the same flexible exchange rate policy until recently.
In a statement last week, Cabraal gave more information. He said the decision to allow exchange rate flexibility was taken by the Currency Board based on a Currency Board document dated March 7, 2022 submitted by the three Deputy Governors Mahinda Siriwardene, Dammika Nanayakkara and Director – Economic Research Department and Director – International Operations Department Yvette Fernando.
The Board 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 the rise in the price of crude oil to nearly $140 a barrel and the escalation 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 d ‘opinion that foreign exchange transactions would take place at levels that are not higher than Rs. 230 per dollar’.
When he resigned on April 4, Cabraal said the rupee was trading at Rs. 289.73/299.99 per dollar in line with the new “flexible” exchange rate policy announced by the Monetary 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 far-reaching decisions which understood the decisions of; sharply increase key interest rates by 700 basis points from April 8 and end repayments of foreign currency loans and interest from April 12.
Cabraal recalled that meanwhile, the rupee continued to depreciate within a rupee range. 364.23/377.50 against the dollar on May 12, when the Monetary Board had apparently once again decided to “fix” the exchange rate in a new range between Rs. 355/Rs. 365 per dollar.
“Such a decision to ‘fix’ the exchange rate appears quite similar to the policy adopted by the Monetary Council chaired by the Governor, Professor WD Lakshman, which ‘fixed’ the rupee exchange rate within a range of rupees . 199/203 per dollar from September 6, 2021,” Cabraal pointed out.