According to media reports, economists and other experts are of the view that the most damaging policy blunder was to imagine that Central Bank can fix the exchange rate at an arbitrary rate it wishes to maintain and persist for a considerable time period.
Nevertheless, we have been following different exchange rate policy regimes in determining the nominal exchange rate for rupee, meaning the rate at which a Sri Lankan can trade rupees for the currency of another country. This is because any movements in the exchange rate is always a concern for economic players, irrespective their being businessmen, consumers, producers, investors and the monetary authorities. The writer has compiled data and prepared the following table to understand how the exchange rates have fluctuated during the last six years under different policy regimes.
As can be seen from Figure 1, there has been a major policy shift effected on March 7 2022. It was allowed to float (managed floating), and CBSL expects the upper limit as Rs 230.
Until March 7, both ‘fixed exchange rate’ and ‘managed floating’ policy regimes have been adopted for a long period of time.
However, the Rs 230 for $ could not be defended and consequently, the rupee was allowed to be floated based on market forces until 12/5/22.
Since 8/3/22 to date, ‘managed floating’ and ‘free floating policy regimes have been adopted.
ulnerable sectors got badly affected:
Let us discuss the sequence of events and ‘pros and cons’ of the different exchange rate regimes by summarising the salient features to understand the fluctuations in the rupee in relation to US$ and its impact in the economy.
Sequence of events:
The private sector including Chambers of Commerce, the opposition and even few government members of parliament and many professionals/academics/economists have insisted that the rupee be floated based on market forces. Then administration was reluctantly compelled to do so, having maintained the rupee around Rs. 203 per US $ from September ’21 up to 7/3/22. It was allowed to float (managed floating), and CBSL expected the upper limit as Rs 230. It can be concluded that wef 8/3/22, both the ‘managed floating’ (pegged) as well as ‘floating exchange rate’ regimes are being adopted to-date. Thereafter, wef 13/5/22, it was slightly changed to a ‘managed floating’ (pegged) policy regime, thereby preventing further depreciation of rupee up to date.