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Sri Lanka Rupee, Stocks Surge As Nation Closes In On IMF Bailout

Sri Lanka’s rupee rallied as China’s support for the nation’s debt plan and the central bank’s move to scrap the currency trading band boosted optimism over an IMF bailout.
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Sri Lankan rupee banknotes and coins at a coconut stall in Kandy, Sri Lanka, on Monday, June 13, 2022. Sri Lanka’s economy is likely contracted in the first quarter, slammed by public protests, political instability, high commodity prices, power shortages and supply-chain snarls. Photographer: Buddhika Weerasinghe/Bloomberg
Sri Lankan rupee banknotes and coins at a coconut stall in Kandy, Sri Lanka, on Monday, June 13, 2022. Sri Lanka’s economy is likely contracted in the first quarter, slammed by public protests, political instability, high commodity prices, power shortages and supply-chain snarls. Photographer: Buddhika Weerasinghe/Bloomberg
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Sri Lanka’s rupee rallied as China’s support for the nation’s debt plan and the central bank’s move to scrap the currency trading band boosted optimism over an International Monetary Fund bailout.

The rupee soared 4% to 325 per dollar on Tuesday, the highest since April, according to local traders who declined to be named as they aren’t authorized to speak to media. The Colombo All-Share Index climbs 2.2%, heading for its highest close since September, while dollar bonds due 2030 held steady. Local markets were shut Monday for a holiday.

China gave assurances that it will support Sri Lanka’s debt restructuring, a key requirement for the IMF’s $2.9 billion bailout, according to people familiar with the situation. The bailout will pave the way for more funding and set the bankrupt nation’s debt restructuring on a steadier path since last year’s default.

“The IMF bailout is getting priced in, but there will still be some upside to the rupee when the deal is confirmed,” said Sanjeewa Fernando, senior vice president of research at Asia Securities Pvt Ltd in Colombo. The rupee will probably strengthen to 300 to 315 rupees per dollar in the near-term, he said.

Five-year local bond yields dropped about 50 basis points to 26% as of 11:52 a.m. local time, Fernando said.

Market Driven

Meanwhile, Sri Lanka’s central bank governor Nandalal Weerasinghe said Friday that the rupee will be fully market-driven from this week in addition to delivering a larger-than-expected 100 basis point rate hike. Allowing the currency to move in accordance with market supply and demand will lead to a fairer exchange rate, which the IMF would like to see. And higher funding costs make it more lucrative for investors to hold the rupee.

The central bank last week widened the currency trading band three times, sparking a rally in the rupee. The band, which limits the movement of the rupee within a certain range, was implemented in May last year to curb the currency’s slide after the nation defaulted on its sovereign debt.

(Updates with comment from analyst in fourth paragraph.)

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