The International Monetary Fund on Friday urged Sri Lanka's central bank to avoid continuous sales of foreign exchange to support the rupee, and said a flexible exchange rate would ease balance of payments pressures.
The Fund's comments came as the Sri Lankan currency rose to 109.30 to the dollar on Thursday, it highest level in 31 months, after the central bank lowered its dollar trading band the previous day to reflect the dollar's global decline. Completing the seventh review of its $2.6 billion loan to the island, the IMF said Sri Lanka's macroeconomic performance was satisfactory and that inflation, which slowed from a 27-month high in May, will remain in single digits.
But the global lender warned high oil prices and rapid import growth could put pressure on the balance of payments as Sri Lanka's $50 billion economy emerges from a 25-year war.
"Strong export growth and continued large remittance inflows have supported reserves. But going forward, rapid import growth and high oil prices could put pressure on the balance of payments," the IMF said in a statement. "In this event, the central bank should allow the exchange rate to reflect market forces ... and avoid sustained sales of foreign exchange, ensuring that reserves remain healthy and the economy competitive."
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