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Coming Unpegged Sri Lankans are growing accustomed to stability above all other virtues. Unsurprisingly, these are troubled times on the economic stability front. Markets and the Sri Lankan Rupee are in turmoil. The camp supporting competitive exchange rates to boost economic growth are no longer in the primacy. However, Sri Lanka’s exchange rate policy is still a confused one; at one time, free floating requiring only occasional Central Bank intervention to smoothen volatility, and another, suggesting it’s pegged to the greenback, albeit lightly. Analysts including Echelon’s Bellwether have blamed liquidity mismanagement under this soft pegged exchange rate for the Rupee’s present crisis. The US dollar has also appreciated, but not every currency is as affected by this. Anchoring a weak currency to a strong one allows a central bank to latch on to stronger institutions and keep expectations steady. However, currency pegs have their own challenges, especially for countries with loose budgets. Recently, the Central Bank announced that it would target inflation. However, Sri Lanka’s Rupee, soft peg or free float, isn’t as well defined a policy.

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