COLOMBO, March 3 (Reuters) – Sri Lanka will ease its currency band from next week, its central bank said on Friday, as part of an effort to move closer to a market-driven exchange rate as it seeks a 2.9 bailout Billions of dollars to get International Monetary Fund.
The central bank also raised interest rates by 100 basis points to combat inflation, which is now at 50% as the country goes through its worst financial crisis since independence from Britain in 1948.
The currency band was widened earlier on Friday to Rs. 10 on either side of the spot rate, from Rs. 7.50 previously, but central bank governor P Nandalal Weerasinghe said guidelines for the currency band would be removed from next Tuesday.
The central bank set the spot rate daily but didn’t say if it would continue to do so after Tuesday.
“The central bank has noted a gradual improvement in FX liquidity in the banking sector. We are careful to curb excessive volatility,” Weerasinghe said, adding that the central bank bought $308 million to keep exchange rates within the range prescribed by the monetary authority.
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“The central bank now has an opportunity to rebuild reserves while minimizing intervention in the foreign exchange market.”
The central bank raised interest rates by 100 basis points, raising the rate on the standing deposit facility and the rate on the standing credit facility to 15.50% and 16.50%, respectively.
Sri Lanka is awaiting IMF bailout approval after economic growth contracted an estimated 9.2% last year while inflation hit 50% last month.
The central bank will also suspend a mandatory order for commercial banks to convert 15% of all dollar receipts next week, the central bank governor said.
Sri Lanka’s reserves were $2.1 billion at the end of January.
Reporting by Uditha Jayasinghe; Editing by Susan Fenton
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