The International Monetary Fund urged Sri Lanka to let its rupee keep sliding and not intervene further to bolster the ailing currency as it fell to historic lows.
The currency bottomed out at roughly 160 rupees to the US dollar on Wednesday — its weakest ever point — despite efforts by the central bank to stop its steady decline in recent weeks.
The bank spent $190 million in May alone to ease pressure on the exchange rate, sounding alarm bells at the IMF.
The Washington-based fund urged Colombo — which is emerging from a balance of payments crisis — to conserve its foreign exchange reserves instead of propping up the rupee.
“We think the central bank has allowed for greater flexibility (in the exchange rate) than in the past,” said IMF mission chief Manuela Goretti.
“The rupee should be allowed to depreciate. When you look at emerging markets, the rupee has depreciated less.”
The IMF extended Sri Lanka a staggered $1.5 billion loan in June 2016, the latest tranche of which was released earlier this month.
The international lender said Sri Lanka’s economy had rebounded since growth fell to a 16-year low of 3.1 percent in 2017.
But it warned Sri Lanka was still vulnerable to shocks from at home and abroad and stressed that restructuring the island’s loss-making national airline and reforming its energy sector was vital to maintain the recovery.
One of the biggest drags on the country’s balance sheet is national carrier Sri Lankan, which has accumulated losses and debts of over $2 billion and is a huge burden on taxpayers.
The government has failed to privatise the airline. Investor interest has been lukewarm at home while international partners have also been elusive.