By Uditha Jayasinghe
COLOMBO, March 3 (Reuters) - Sri Lanka will relax its
currency band from next week, its central bank said on Friday,
as part of efforts to move towards a market-determined exchange
rate as it seeks to secure a $2.9 billion bailout from the
International Monetary Fund.
The central bank also raised interest rates by 100 basis
points to tackle inflation now running at 50% as the country
endures its worst financial crisis since independence from
Britain in 1948.
The currency band was widened earlier on Friday to 10
rupees either side of the spot rate, from 7.50 rupees
previously, but Central Bank Governor P. Nandalal Weerasinghe
said guidance on the currency band would be removed from next
Tuesday.
The central bank has been fixing the spot rate daily but did
not say whether it would continue to do so after Tuesday.
"The central bank has seen gradual improvement in the forex
liquidity in the banking sector. We are careful to contain
excessive volatility," Weerasinghe said, adding that the central
bank purchased $308 million to maintain exchange rates within
the corridor mandated by the monetary authority.
"The central bank now has the capacity to rebuild reserves
while minimizing forex market intervention."
The central bank raised interest rates by 100bps, pushing
its standing deposit facility rate and standing lending facility
rate, to 15.50% and 16.50% respectively.
Sri Lanka is awaiting approval for the IMF bailout package
after seeing economic growth shrink by an estimated 9.2% last
year amid soaring inflation that hit 50% last month.
The central bank will also next week suspend a mandatory
directive given to commercial banks to convert 15% of all dollar
earnings, the central bank chief said.
Sri Lanka's reserves were at $2.1 billion at the end of
January.
(Reporting by Uditha Jayasinghe; Editing by Susan Fenton)
