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Monday, September 26, 2022

Decision to float rupee was taken by Monetary Board: Cabraal – The Morning

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  • Says decision was not his alone 
  • Compares Nandalal’s rupee fix with Lakshman’s

By Imesh Ranasinghe 

Former Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal stated that the decision to float the rupee against the US dollar from 7 March 2022 was taken by the Monetary Board, and was not a “unilateral” decision by him. 

Cabraal responded to allegations that he had decided on the floating of the rupee by issuing a statement that said the decision to allow flexibility in the exchange rate was taken by the Monetary Board of the CBSL based on a Monetary Board Paper dated 7 March 2022 submitted by all three Deputy Governors (Mahinda Siriwardene, Dammika Nanayakkara, and Yvette Fernando), as well as the Directors of the CBSL’s Economic Research and International Operations Departments. 

“The Board Paper stressed the need for changing the exchange rate policy immediately in order that the exchange rate acts as a ‘shock absorber’ in the face of adverse developments in the global front on Sri Lanka’s already fragile balance of payments, including the increase of the crude oil price to nearly $ 140 per barrel and the worsening Russia-Ukraine war,” the statement said. 

He said that based on that Board Paper and the discussion at the meeting, the Monetary Board had decided to “allow the market to have greater flexibility in the exchange rate with immediate effect and communicate that the Central Bank is of the view that forex transactions would take place at levels which are not more than Rs. 230 per US dollar”. 

Further, he said that while the Monetary Board had expressed its “view” as to the level at which forex transactions would take place as a market guidance, a clear decision had been taken to allow for the flexibility of the Sri Lankan rupee in the forex market. 

Moreover, he said that the Monetary Board under Governor Dr. Nandalal Weerasinghe once again decided to “fix” the exchange rate at a new range between Rs. 355.00/365.00 per US dollar, as the rupee was depreciating rapidly. 

Such a move to “fix” the exchange rate seems quite similar to the policy adopted by the Monetary Board chaired by Governor Prof. W.D. Lakshman, which “fixed” the rupee exchange rate at a range of Rs.199.00/203.00 per US dollar from 6 September 2021 onwards. 

“It must of course be understood that there will always be conflicting opinions among stakeholders as to the value, timing and methodology to be followed in ‘fixing’, ‘floating’, or ‘pegging’ a country’s currency,” Cabraal said. 

The former Governor also added that after decisions are taken to “float”, “fix”, or “peg” the currency, others could claim that the decision was right or wrong, or that it could have been implemented differently. 

However, he said that it must be understood that the decision-making authority has to make its decision based on the prevailing circumstances, expert advice, practical ground conditions, the judgement of future expectations and outcomes, etc. when viewed holistically. 

Therefore, he explained, that is why the Monetary Law Act provides the authority to the Monetary Board to change financial and monetary sector policies (including the exchange rate policy, interest rates, statutory reserve ratios, etc) when it deems appropriate to do so, from time to time.

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