The Sunday Leader

Rupee Issue: A Litmus Test For The New Govt

by Hasitha Ayeshmantha

The Sri Lankan rupee took another turn for the worse last Friday when the value of the Sri Lankan rupee was recorded as low of Rs. 143 per US dollar. With this revelation a dark cloud of uncertainty has engulfed the Sri Lankan financial sector and especially the Sri Lankan imports sector.

The Sunday Leader this week features an in depth analysis on how the depreciation of the Sri Lankan Rupee will affect the future functionality of the country’s economy and wills surely put to the test the integrity and a litmus test on the new government.

Many organisations both private and state, business chambers, importers organisations and other establishments associated with imports and foreign markets, have raised alarm over the matter claiming that the current situation will deliver a massive blow to the country’s import sector and hinder the functionalities of the local market.

Also in a recent statement by the Central Bank of Sri Lanka (CBSL) it is stated that the decision of the Central Bank to allow greater flexibility in the determination of the exchange rate from September four is expected to help reduce the trade deficit further while improving the country’s gross official reserves, thereby leading to greater external sector stability.

The concerns over the Sri Lankan Rupee came to the fore when the value of the rupee started climbing from its former value of Rs.134 per US dollar and then started slowly creeping towards the Rs. 140 mark. Waves of concerns arose on the backdrop of the aforementioned incident when economists from all over the financial spectrum started predicting that negative signs are visible on the horizon of the Sri Lankan economy.  Also at a discussion organised by the International Labour Organisation (ILO), a panel of economists said that sharp rupee depreciation is not the best stance for Sri Lanka to face the global recession head-on.

Commenting on the impact of the Rupee depreciation o the local business and import sector, President of the National Chamber of Commerce Sri Lanka (NCCSL), Thilak Godamanna told The Sunday Leader that the National Chamber of Commerce and its members will witness the effect of the rupee depreciation first-hand as a majority off their members are importers, and under the given circumstances, Sri Lankan importers falls on the frontlines to witness the weight of the situation.

Outlining the impact, the NCCSL President said that this is indeed a trying time for the new government and that the situation will be further tightened over time if the government does not address the issue at this stage. He also stated that more pressure will be asserted on the public sector as well because along with the importers exwill also have to increase the prices of imported goods. He added that ultimately the burden would be transferred to the general public.

He also stressed that at this point, the increase in prices of imported goods will be inevitable and that alongside that the country’s cost-of –living will also increase on the sidelines. The NCCSL President also expressed concerns over the fact that the present status of the Sri Lankan market, the country cannot afford to sink-in to the situation and jeopardise the economic structure. Godamanna further strengthened his remarks by saying that the new government will have to come up with a proper action plan to address the situation during the next Budget and that the matter has to be addressed with a proper understanding.

 

Export sector benefited

Meanwhile, also commenting on the same agenda, Chief Economist of the Ceylon Chamber of Commerce (CCC) Anushka Wijesinghe told The Sunday Leader that the export sector will be able to extract certain benefits off this situation. He said that the Ceylon Chamber of Commerce comprises of both exporters and importers, and they see the situation as an opening for the exports community to capitalise on and turn this challenging situation to their benefit.

Wijesinghe however stressed that the depreciation of the rupee itself could not be counted as a positive agenda and that the outcome of the next budget will be crucial to determine the falling direction of the rupee and added that if the government diverts more attention towards establishing investor confidence, it will influence the government to attract more foreign investments. Eventually generating more revenue and boosting the economy.

He also pointed out that during the past few months; the value of the Sri Lankan Rupee has been fluctuating on a regular basis, hence creating an aura of volatility around the entire subject. However, Wijesinghe said that at this point it is difficult to forecast whether this situation will continue or will settle down after sometime. He also said that the intervention of the Central Bank and the Treasury, especially in during this critical time period  will also play a vital role in determining the future functionality of the Sri Lankan Rupee.

In a recent analysis conducted by Frontier Research it was stated that in 2011 and during the earlier part of 2012, the currency defense leading up to the devaluation was greater than the latest cycle. In this sense, the CBSL acted quicker in floating the rupee than it did last time.

In the second stage of the analysis it was stated that a key factor driving external weaknesses is an ‘outflow’ of dollars from government securities. Foreign holdings as a percentage of total local government securities now stand under 8% which is the lowest since 2010 for this metric.

Furthermore, according to sources attached to the Central Bank, there are no visible signs of printing of money in the near future. In that case, they are not concerned about a 187 billion rupee holding of government securities, a level last seen in December 2012. The peak holding of government securities during the 2012 cycle was 266 billion rupees in April 2012.

 

Exports nation

When taking all the above factors into consideration, it leaves the question as to whether Sri Lanka wants to branded as an exports nation, if that is to be so, it is much more preferable for the dollar rate to go higher and aid the revenue generation through exports. On the other hand, if Sri Lanka wants to be branded as a knowledge economy, in which case a stronger rupee is preferable.

Commenting on the above situation, renowned Economist Dr. Sirimal Abeyratne told The Sunday Leader that even though the Central Bank pledged not to intervene in Sri Lanka’s affiliations with foreign markets, and subsequently looking to ‘enforce’ a certain level of stability to the Sri Lankan rupee and to the entire economy, Dr. Abyeratne believes that this venture is not fundamentally possible.

Dr. Abeyratne firmly remarked that we cannot expect the Sri Lankan market to stabilise on its own. Given the capacity and the density of the local market, even miniature dealing within the Colombo bourse, is able to create a visible fluctuation in the stock market. Therefore, he states that we cannot expect an isolated and limited market as that of Sri Lanka to uphold stability, especially under severe pressure.

Giving out statistics to support his argument, Dr. Abeyratne stated that the annual export revenue for Sri Lanka is estimated at 11 billion US dollars and the annual import figures stands at 19 billion US dollars, the trade deficit is calculated as 7 billion US dollars per annum. The above statistics will aid to determine which side of the balance the country is located on. On the same note, in a recent statement to media, Governor of Central Bank of Sri Lanka, Arjuna Mahendran said that the Central Bank in the past has been restricting its mandate to financial stability and the control of inflation. He said that there is a third objective which is mandated in our Monetary Law Act which is enhancing economic development of the country through various forms.

He also added that one is through getting involved in the regions in terms of looking at regional development and being able to pilot particularly the flow of banking credit to different areas of the country. Hence according to the CBSL Governor, although inflation has been driven by lower international commodity prices, a greater pumping of credit to the regions could stimulate regional development.

 

Concerns:

Will the depreciation of the rupee continue?

Volatility of the rupee and regular fluctuations in the value

Determining the favorable sector for the country (import/export)

The ability for the market to stabilize on itself

Outflow of dollars from government securities

Wellbeing of the import sector

The outcome of the next Budget being crucial

Cost of living and cost of imported goods going higher

2 Comments for “Rupee Issue: A Litmus Test For The New Govt”

  1. Rasa

    This problem is expected to continue, as we Sri Lankans are happy to continue importing almost everything ranging from basic agricultural items to manufactured products. We talk about exports and start exporting basic items whatever we have, including basic food items and fish, causing a shortage of those items at home and raising the cost of living. Our agriculture production is not going well and we import many basic products like even green chilies and even onions from abroad. We export all our good basic fruits like even papaya and the best fishes abroad, creating a shortage at home and the prices going many times high, which make people to mange with ambul or forget about having a fruit. We have the sea all around our Sri Lanka, but unlike those days there is a severe shortage of fish with high prices.
    So we have a long way to go, and identify our priorities and take the common man’s life seriously.
    Rasa

  2. Kenneth Chelian

    The issue is this government arrogance towards to China.

    Get the money from China and let them run the show in development projects.

    Even the USA government runs on borrowed money from China. Even the US government debt is around 20 Trillion dollars. This amount is like this. US $ 20, 000,000,000,000/= This amount will never be paid by US government. Another perspective. If you have spend a million dollars every day from the day Jesus was born until end of this year it will be US $ 735,475,000,000/= ie not even 1 Trillion. USA will never pay these loans since it is simply impossible to pay.

    This government is on the wrong path of going after Western countries. Western countries are already bankcrupt. World show runs on Chinese loans.

    China Exim bank has given more foreign loans than loans given by IMF and World Bank collectively in Year 2014 to Asia, Africa and Latin America.

    Give couple of weeks, this Sri Lankan government will be begging China to rescue them. Of course Chinese are waiting for that.

Comments are closed

Photo Gallery

Log in | Designed by Gabfire themes