The decision to allow the Sri Lankan Rupee (LKR) to be “flexible” from March 7, 2022 onwards is sometimes described by certain persons as being an “unilateral” decision of then Governor Ajith Nivard Cabraal.
Therefore, this statement is to provide the factual position so as to set the record straight.
The decision to allow flexibility in the exchange rate was taken by the Monetary Board of the Central Bank of Sri Lanka based on a Monetary Board Paper dated March 7, 2022 submitted by all three Deputy Governors (Mahinda Siriwardene, Dammika Nanayakkara and Yvette Fernando), Director – Economic Research Department and Director – International Operations Department.
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 fronton Sri Lanka’s already fragile Balance of Payments, including the increase of the crude oil price to nearly USD 140 per barrel and the worsening Russia-Ukraine war.
Based on that Board Paper and the discussion at the meeting, the Monetary Board decided to “allow the market to have a 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”.
From the above it will be clear 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 LKR in the forex market.
On the same day, a statement was issued to the media in line with the above decision. (Refer: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/p…)
Further, within about a week of floating the LKR, the President made a formal announcement that the government had initiated discussions with the International Monetary Fund (IMF) for a programme.
Subsequently, Governor Cabraal resigned on April 4, 2022, on which day, the LKR was trading at Rs. 289.73/299.99 per USD in accordance with the new “flexible” exchange rate policy as announced by the Monetary Board. After Governor Cabraal’s exit, the Monetary Board chaired by the new Governor Dr.Weerasinghe continued with the “flexible” exchange rate policy, whist the Government and CBSL also took a series of far reaching decisions which included the decisions to: sharply increase policy interest rates by 700 bps from April 8, 2022 onwards and to discontinue repayments of forex loans and interest from April 12, 2022 onwards.