The International Monetary Fund (IMF) has reclassified Sri Lanka's exchange rate regime from free float to managed float.

Sri Lanka's violation of its Article VIII obligations and heavy official interventions in exchange controls are given as reasons by the IMF for the reclassification.

L/C concerns

The IMF is specifically concerned about Sri Lanka's interventions in letter of credit (L/C) transactions.

Sri Lanka's curbs on import L/Cs "was an exchange control on current payments which was against the country's Article VIII obligations and amounted to exchange controls", according to an IMF statement.

IMF rejection

The IMF's Article VIII stipulates that member countries shall not, or at least notwithoutIMF approval, impose restrictions on the making of payments and transfers for current international transactions.

In 2004, Sri Lanka rejected an IMF-backed recovery plan in favour of its own economic strategy that as well as L/C interventions included high deficits, fuel subsidies and expansionary central bank financing of the budget through loose monetary policy.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.