Sri Lanka sharply depreciates currency as crisis bites

Sri Lanka announced a near-15 per cent depreciation of its currency Monday, four days after the IMF called for devaluation and higher taxes to revive the almost-bankrupt economy.

The Central Bank of Sri Lanka said it will allow "greater flexibility" so that the market will determine the exchange rate, which has been pegged at 197 rupees to the dollar since last April.

The bank said it hoped the rupee will not fall to more than 230 to the dollar, suggesting it will intervene to ensure that the depreciation is limited to about 15 per cent.

A severe foreign exchange shortage has led to fuel and electricity rationing across the South Asian nation of 22 million, and has crippled public transport and caused long queues for food and medicines.

Essentials such as milk powder, sugar, lentils and wheat, as well as medicines, are in short supply as the country maintains a wide import ban in place since March 2020 to save foreign currency.

The pandemic pushed the South Asian island's tourism sector -- a key foreign-exchange earner -- off a cliff, and the government has failed to boost its foreign reserves, sparking fears that the country may not be able to repay its $51 billion foreign debt.

The International Monetary Fund on Thursday stressed "the urgency of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability", recommending a return to a "market-determined and flexible exchange rate" -- meaning a devaluation of the rupee.

Among IMF recommendations to address the crisis was to raise income taxes and VAT.

The Central Bank of Sri Lanka in a brief statement said its decision to devalue -- despite resistance from local business leaders -- was due to the "severity of the external shocks and recent developments in the domestic front."

Official data shows Sri Lanka needs nearly $7 billion to service its foreign debt this year, but the country's external reserves at the end of January were only $2.07 billion -- just enough to finance one month's imports.

While the central bank's set exchange rate is 197 rupees to the dollar, a thriving black market offered 260 rupees for US currency notes.

This disparity has led to a more than 50 per cent decline in foreign remittances through official banking channels.

The shortages of fuel, food and raw materials pushed inflation to 16.8 per cent in January -- the fourth consecutive record rise -- and the IMF said it expected it to remain in the double digits.

International rating agencies have downgraded Sri Lanka over expectations it may not be able to service its foreign debt, though the government insists it can meet its obligations.

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