COLOMBO: The International Monetary Fund (IMF) on Friday welcomed Sri Lanka's policy shift towards a flexible exchange rate, saying it will help contain the trade deficit and protect the nation's dwindling foreign exchange reserves.
In a marked policy shift, Sri Lanka's central bank on Thursday said it would allow the market to determine the currency's rate rather than defending a particular level.
Instead, its intervention will only ensure there are enough dollars in the market for Sri Lanka to meet oil import costs.
The IMF has been calling for more flexibility in Sri Lanka's exchange rate and had even withheld the eighth tranche of a $2.6 billion loan to Sri Lanka after the central bank failed to change its policy.
"We welcome the move toward greater exchange rate flexibility," Koshy Mathai, the IMF resident representative for Sri Lanka said in an e-mailed statement.
"This step, supported by a firm monetary and fiscal policy stance, should help to reduce the trade deficit and safeguard reserves at the central bank."
Until the Thursday's policy, the bank had been defending a certain price level by selling dollars and spent more than $2.7 billion, or a third of its reserves, since July.
The central bank's insistence on holding the rupee steady, despite a jump in imports, had left the rupee overvalued, analysts said.
The bank last week raised interest rates to avert a balance of payments crisis, saying cheap loans are spawning high imports. The nation's trade deficit widened to a record $8.84 billion between January and November 2011.
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