The Sunday Leader

Rupee

With yields on Government securities, coinciding with the war end falling, purchase of such securities is seemingly now unattractive to foreign investors, hence the drying up of foreign inflows into that sector.

Coinciding with this scenario, import pressure due to seasonal demand, complemented by falling interest rates, built-up in the week ended November 27 also began growing, which caused the U.S. dollar to appreciate at the expense of the rupee then.

Some market sources expected the dollar to go up to the Rs. 115 levels (per unit) if not for Central Bank of Sri Lanka (C.B.S.L.) intervention at that time.

In the week ended November 27, C.B.S.L. through its agent, state owned Bank of Ceylon, was offering dollars to the market at the spot rate of Rs. 114.60, thereby preventing the greenback from appreciating further. The previous day November 26, the greenback was being quoted at Rs. 114.50, 10 cents less than the November 27 quote of Rs. 114.60.

The situation was compounded by the fall in exports due to the global recession, making dollar or foreign exchange (forex) inflows into the country still weaker.

This was in contrast to what it was a few weeks earlier. With a spate of foreign inflows into the Government securities market, the pressure then was for the rupee to appreciate against the greenback.

This resulted in C.B.S.L. buying dollars at the Rs. 114.80 levels for a sustained period of time to prevent the exchange rate from strengthening beyond those levels.

But last week foreign exchange (forex) proceeds once more started flowing into the market causing the rupee to appreciate, with C.B.S.L. changing its role from the previous week by becoming a buyer of dollars from the market in order to prevent the rupee from appreciating further.

C.B.S.L. was buying dollars at Rs. 114/30 per unit from the market on Thursday, which changed to Rs. 114/35 on Friday. Foreign inflows are now coming into the stock market.
The direction of the rupee rests in the hands of C.B.S.L., market sources told this reporter.

A weak rupee is good for exporters because he can get more rupees for his dollars, but bad for the Government as it makes its foreign debt servicing more expensive-more rupees needed to buy dollars to pay back debt, and difficult also for the consumer as it makes imported goods expensive.

On the other hand a strong rupee means that exporters won’t get as many rupees as they would like to have had got for their dollars, though the Government would be able to buy dollars to service its debt cheap, and at the same time it would make imports cheaper for the consumer.

Is it possible for the exchange rate to strike the right balance, where it’s beneficial to all three parties, i.e. the government, the consumer and the exporter?
Reining in the budget deficit, therewith curbing inflation may be the answer.
The deficit may be contained by having a check on Government’s current expenditure. Among the major components of the Government’s current expenditure basket are salaries and pensions, debt servicing and subsidies, including that of education and health.

Proper checks and balances and cost rationalization of the afore-mentioned components in the current expenditure basket would help strike that right balance in the forex equation, to the satisfaction of all key market players.

Unemployment

An article that appeared on these pages last week said that youth unemployment in Sri Lanka, i.e. those between the ages of 15 and 24 years of age showed a high figure of over 20%. This is a potential powder keg, which, if unattended to, may explode into another insurrection.

That page also carried an article that showed that the loss of the G.S.P. + concession would impact on other sectors of the economy as well, with this negativism not confined to the particular industry that is directly affected only.

It cited the example of an engineering firm servicing mainly the garment industry, suffering a steep slow down in business due to the recession and the uncertainty over the G.S.P. + extension.

From a Rs. 100 million annual turnover, it has slumped to Rs. 25 million, mainly because garment manufacturing companies are not expanding, but rather adopting a “wait and see” approach, primarily because of their concerns in regard to the fate of the G.S.P. + concession.

That engineering firm is one of several other suppliers which would feel more than a pinch in the event the G.S.P. + facility is lost to Sri Lanka. Transporters, food suppliers, accessory suppliers, all of them too would be affected in such a scenario.

G.S.P. + allows Sri Lanka to export over 7,000 items to the E.U. on a duty free basis. However only a few local industries, such as the garments sector, Sri Lanka’s largest forex earner, has made use of this facility.

But Sri Lanka stands to lose this concession due to alleged human rights abuse, especially in its prosecution of the war against terrorism, as this concession is connected to the observance of the same.

The E.U. has drawn a roadmap for Sri Lanka to follow to help stave off a possible loss of this facility by following this path. Cooperation and dialogue, and humility on the part of the Government may yet help Sri Lanka to keep this facility which it has been enjoying for the past four years.

That would possibly pave the way for Sri Lanka to continue to enjoy this concession till its expiry on December 31, 2011, rather than losing it midway.

2 Comments for “Rupee”

  1. This is a really great post, I’m glad that you put this content out there for everyone, and I’m sure that others feel the same way!

  2. Euro/Dollar break downwards…

    The EURUSD has broken below the low floor at the 1.4066 level reaching a low at 1.4054 but has pushed back toward the break level (1.4066 ). The quick reversal is not necessarily the best reaction for the bears. However, risk remains up to the 100 bar …

Comments are closed

Photo Gallery

Log in | Designed by Gabfire themes