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Cablegate: Sri Lankan Rupee Slides Against Dollar

VZCZCXRO5266
RR RUEHLMC
DE RUEHLM #1733 2930651
ZNR UUUUU ZZH
R 200651Z OCT 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4519
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0080
RUEHKA/AMEMBASSY DHAKA 9511
RUEHIL/AMEMBASSY ISLAMABAD 6416
RUEHKT/AMEMBASSY KATHMANDU 4467
RUEHKP/AMCONSUL KARACHI 2039
RUEHCG/AMCONSUL CHENNAI 6969
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS COLOMBO 001733

SIPDIS

STATE FOR SCA/INS AND EB/IFD/OMA;

COMMERCE FOR E YESIN

TREASURY FOR S CHUN

MCC FOR D NASSIRY AND E BURKE

SIPDIS

E.O 12958: N/A
TAGS: ECON EFIN CE
SUBJECT: SRI LANKAN RUPEE SLIDES AGAINST DOLLAR


1. Summary: The Sri Lankan depreciated markedly in the past three
weeks and touched an all-time low of Rs 107.40 to the dollar on
October 17. However, after the Central Bank commented against
excessive speculation on the same day, the slide did not continue.
End Summary.

2. The Sri Lankan rupee slid by about 4 percent during the past
three weeks touching an all time low of Rs 107.40 to the dollar on
October 17. The rupee started its steep depreciation after the
Central Bank withdrew from intervening in the market since early
October. Previously, the Central Bank was intervening in the market
to contain import prices (including oil) and maintain confidence in
the market. According to a senior Central Bank official, the Bank
has sold about USD 400 million since January 2006 to defend the
rupee.

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3. As the rupee's slide continued early this week and some banks
booked dollars heavily, the Central Bank issued a statement warning
against excessive speculation. The Central Bank said that certain
players are transacting at levels well beyond normal import/export
requirements. It added that excessive speculation is unwarranted as
foreign exchange reserves were healthy and likely to increase in the
coming months. According to the Central Bank, official foreign
reserves stand at $2.4 billion - sufficient to finance about 3
months of imports. Following this statement the rupee gained, and
closed around Rs 106 on October 19.

4. The Central Bank expects the rupee to continue trading around
current levels for the short term, but to gradually depreciate.
Commercial banking sources allege the Central Bank is regularly
resorting to moral suasion to discourage banks from speculating and
trading excessively in the market. According to them, the
government could introduce other regulations to control the foreign
exchange market, such as placing new limits on overnight positions
and forward currency trades, if speculative activity continues.

5. Comment: Due to inflation running over 15 percent, a widening
trade deficit, as well as the recent strengthening of the dollar in
the world markets, the rupee's slide was anticipated. The
depreciation has provided a much needed adjustment to the currency,
and will help Sri Lankan exports to remain competitive. Sri Lanka's
trade deficit has expanded by over 50 percent in the first eight
months of the year to USD 2.4 billion from USD1.5 billion in 2005.
End Comment.

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