In another desperate step to bail itself out of the deepening economic crisis, Sri Lanka's central bank on Monday allowed the country¡¯s currency to depreciate.?
It set an exchange rate limit of 230 rupees to the dollar, hence effectively allowing a currency depreciation amidst the hope to attract investment and remittances and ease the worst financial crisis in years.
In recent times, the Central Bank of Sri Lanka (CBSL) had been criticized by economists and analysts for maintaining an unofficial dollar peg since October at 200-203 rupees, as per a report in Reuters.
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So now, this depreciation is expected to encourage remittances, which has been a major source of foreign exchange in Sri Lanka and had dropped to a decade low mark of $5.49 billion in 2021.
The report also stated that Sri Lanka's foreign reserves dropped to $2.36 billion at the end of January 2022. And in just about four months, Sri Lanka has to repay about $4 billion in debt including a $1 billion international sovereign bond maturing in July 2022.
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In a statement, the central bank said "Greater flexibility in the exchange rate will be allowed to the markets with immediate effect. The Central Bank is also of the view that forex transactions would take place at levels which are not more than (Rupees) 230 per US dollar".
Experts said the central bank should have set a higher exchange limit to increase remittances, as per?Reuters,
An economist at the University of Colombo said "This move could help exporters but it is too little too late for migrant workers who are now used to higher curb rates and are unlikely to shift to bank rates."
He further said the central bank should have set the rate at about 250-260 if it wanted to bring in more remittances. "However, if CBSL keeps pushing up rates that is likely to increase inflows through official channels."
Previously, the central bank of Sri Lanka had announced a host of measures in December 2021, including giving an additional 10 rupees per dollar as an incentive, but this turned out to have a limited impact, with remittances dropping 61.6% to $259 million in January 2022, from $675 million a year earlier.
Now, it remains to be seen how much this latest currency depreciation move turns out to be helpful for the debt-ridden island nation, which is falling deeper into crisis with each passing day.
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