Central Bank pledges to sustain the rupee at a reasonable value

Defending the current flexible exchange rate policy, the Central Bank (CB) this week pledged to sustain the rupee against the dollar at a reasonable value but assured intervention in the financial markets if the pressure was ‘unbearable.’

Governor Indrajit Coomraswamy told a media conference in Colombo convened in connection with the release of the bank’s 2017 annual report, that the current rate of the rupee is competitive and the monetary policy could be adjusted accordingly while the CB’s priority is inflation targeting.

He said, “because Sri Lanka is a highly indebted country in terms of foreign debt, and we need to boost exports to get out of that problem, it is important to have a competitive currency which is slightly undervalued at present.” The present exchange rate will help to meet the government’s priorities in terms of exports and FDIs, he added.

He was of the view that, “there will be political pressure to undermine the framework but it is very important that this fiscal consolidation continues and the progress the Government has made is reflected in the recent Staff Level agreement with the IMF on the fourth review of the Extended Fund Facility ).”

Explaining the factors behind the current economic situation, he pointed out that the country’s exports came come down to about 12.4 per cent of GDP in 2014 from 33 per cent in 2000. At the time where exports were collapsing, external borrowings increased to an extremely large amount from nothing in 2007.

The present situation has been due to allowing exports to come down so sharply and go on a commercial borrowing spree by the former regime, he argued.

The country’s current trade deficit must be contained through the depreciation of the currency and an increase in interest rates, he said adding that the depreciation of the rupee will increase import prices and thereby curtail import expenditure.

He was of the view that the depreciation of currency will be helpful for the country’s export competitiveness and if it is not done then it would increase the trade deficit further.

The market works pretty well except for the last four days, he said adding that if there is a misalignment between the trends in the market and the economic fundamentals the CB “would definitely intervene.”

He said “there was no reason why there should be volatility in the exchange rate because our foreign reserves were around US$10 billion and in addition the government has just closed bids of term loan of a further $ 1 billion which the response was so good and the consideration is being given to up-scaling it.”

Reserves have been increased in

quantity and quality as the short-term swaps while commercial banks have reduced from $ 2.5 billion to $ 1.5 billion, he said pointing out that non debt creating reserves have been boosted with the purchasing of $1.6 billion.

Dr. Coomaraswamy noted reserves will further increase with the receipt of the last tranche of $ 600 million from the Hambantota port lease.

He noted that external debt liabilities will not increase by rupee depreciation as the borrowings and repayments are being done in US dollars and it has nothing to do with the rupee.

But he noted that, “when the borrow-

ing takes place, for accounting purposes, it is recorded in rupees and when you depreciate the currency that amount does increase but you pay back out of inflows into the country”.

The flexible exchange rate policy of the bank and its non- intervention stance in the market has resulted in the volatility of the rupee against the US dollar, Senior Deputy Governor Nandalal Weerasinghe said.

It has allowed the foreign exchange market to determine the exchange rate without intervening; he said adding that more volatility in exchange rate was evident at present.