For the second time in recent history the Central Bank of Sri Lanka decided to free float the rupee against the US Dollar. The first such instance was in 23rd January 2001 and once again last Friday, the 7th September 2015.
The rationale for this decision was clearly based on the significant loss of external liquidity as a result of a) wider than expected trade deficit b) out flow of bonds and c) Central Bank intervention in the rupee in forex markets. Such external liquidity leakages prompted considerable deterioration in the country’s balance of payments. The overall BOP is estimated to have recorded a deficit of US dollars 791.7 million during the first six months of 2015 in comparison to a surplus of US dollars 1,954 million recorded during the corresponding period of 2014. Data also indicates that external reserves dropped by more than USD 2.0 billion in the past 8 months. The decline in BOP is happening in spite of the drop in international oil prices which is an extremely advantageous global development for Sri Lanka.