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Sri Lanka devalues the rupee

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The Central Bank of Sri Lanka last night devalued the rupee by 15%, moving the exchange rate against the US dollar from USD 1 / LKR 200 to LKR 230. This is one of several steps that will be needed if the economy is to avoid a full-blown debt crisis.

In recent times, the rupee officially floated independently, but in reality the central bank often intervened in markets to artificially support exchange rates. Such management made the rupee overvalued and a black market developed offering fairer value rates. Official and illicit rates had diverged by approximately 15%, so the devaluation unites them. Whether the rupee will now be allowed to float freely, as per official policy and International Monetary Fund advice, remains to be seen.

We explained in January what had gone wrong with Sri Lanka's economy and that it was seeking help from the IMF. Yesterday's devaluation is aimed at securing a rescue package, but authorities will need to cut spending significantly as well. The country is in for a prolonged period of austerity and low GDP growth, it seems, at a time when inflation is likely to remain high.

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