By Mandana Ismail Abeywickrema
With calls from the export sector to devalue
or permit the depreciation of the rupee
against the dollar for the sector's survival
in the international market, on the flip
side the import sector has expressed concern
over the possibility of huge price increases
in essential commodities if the government
decides to allow devaluation of the rupee.
The decline in the country's foreign
reserves has further compounded the
situation with the government being unable
to devalue or allow the depreciation of the
rupee against the dollar in line with market
However, the government has so far claimed
it has no intention of either devaluing or
allowing the depreciation of the rupee due
to the impact it would have on the country's
imports and has also said the position of
the currency should be determined by market
Exporters claim that the Central Bank's
intervention to peg the rupee at various
levels has had an adverse impact on the
According to exporters, if the currency is
allowed to depreciate in line with the
market forces, the export sector could be
competitive in the international market.
Exporters have expressed concern over the
Central Bank's intervention to stabilise the
rupee against the dollar due to its negative
impact on the export sector.
"The fact is that we lose competitiveness.
When the cost increases, the buyers are
hesitant to purchase," exporters said.
Members of the export sector have also
highlighted the need for a stable mechanism
to be put in place to reflect the market
Secretary General, Joint Apparel
Associations Forum (JAAF), Rohan Masakorale
explained that had the government allowed
the rupee to depreciate gradually in line
with market forces, the impact of a sudden
depreciation could be minimised.
However, due to the government's short-term
borrowings from the international market,
the rupee that was depreciating against the
dollar began to appreciate. The last few
months saw the rupee pegged between the
levels of 107 and 108 against the dollar.
According to Masakorale, the situation would
see a change once the short-term borrowings
and the oil bills are paid back.
He pointed out that the rupee has seen a
depreciation of about 5% during the last two
to three months.
He notes that the sudden ups and downs in
the rupee value was indicative that there
was no free depreciation and that market
forces were not allowed to take their
"The rupee according to current market
forces should be around 135 against the
dollar, but we could even manage if it is
120 against the dollar at present,"
Depreciation of the rupee
Exporters have called on the government to
allow market forces to determine the
depreciation of the rupee.
The solution now they say is to allow the
rupee to first depreciate to a level of 120
against the dollar and then permit a gradual
depreciation of the rupee while discouraging
the import of non essential items.
However, the Central Bank would not be able
to sustain the sudden depreciation of the
rupee, it has been pointed out.
Masakorale said that there was a clear
intervention of the Central Bank in the
foreign exchange market. The rupee that was
pegged at 108 against the dollar increased
to 113 in a short period. However, analysts
note that if the real effective rate was in
place, the rupee should be at around 135
against the dollar at present.
Masakorale observed that the export sector
in the country was currently facing serious
issues due to the Central Bank intervention
in holding the rupee at current levels.
The pressure felt by the export sector in
the country would undoubtedly be felt by the
government in the days to come.
Countries in the region like India and
Bangladesh have so far allowed the gradual
depreciation of their currencies.
While the exporters continuously call for
the depreciation of the rupee according to
market forces, the import sector of the
country has voiced a different opinion.
Importers have voiced their disapproval over
the request made by exporters claiming there
would be an adverse impact on the import
sector if the government were to devalue the
According to importers, consumers would be
directly affected by such a decision due to
the price increases in many essential items
and the cost of living is likely to soar.
"Prices of commodities like sugar, dhal and
wheat flour, which are imported to the
country, would increase if the rupee is
devalued," importers said.
They say that the positive market conditions
experienced currently due to the decline in
global commodity prices would be lost if the
rupee is devalued.
"Even the country's oil import bill that has
seen a decline in the recent months would
see an increase once again," importers
Meanwhile, President Mahinda Rajapakse has
ruled out devaluation or the depreciation of
the rupee to levels in keeping with other
countries due to the impact on import costs.
Sri Lanka Tea Board Chairman, Lalith
Hettiarachchi had reportedly said at a
recent meeting, the President had explained
that it was not possible to devalue the
rupee to the levels that other countries
have devalued their currencies, because of
the impact on the import bill.
Solution to the problem
Trade and Consumer Affairs Minister Bandula
Gunawardena said that the government's
solution to the problem was to follow market
forces. He says that lobbying by the export
and import sectors cannot determine the
position of the exchange rate as it is
The position of the rupee according to him
should reflect the supply and demand
He explained that artificial devaluation of
the rupee was a proposal by the
International Monetary Fund (IMF) to solve
any foreign exchange issue, but was now an
According to Gunawardena, the J.R.
Jayewardene government on November 15, 1977
artificially devalued the rupee to boost the
The answer to the problem as noted by
Gunawardena is to allow market forces to
determine the position of the rupee. He said
that while Sri Lanka followed a 'guided
market exchange rate,' the Central Bank
intervenes when certain elements in the
foreign exchange market try to artificially
change the market conditions.
"We do not have an open capital account, we
only have an open current account when you
take balance of payments," he said.
Decline in foreign reserves
However, Gunawardena admitted to a
short-term decline in the country's foreign
reserves due to the payment of high fuel
import bills made a few months back and the
outflow of dollars from the country during
the onset of the global recession.
He said that the Central Bank has already
taken steps to solve the crisis within the
next few months.
The solutions adopted by the bank include
the selling of Treasury Bills to Sri Lankans
living overseas, the increase of interest
rates for NRFC accounts and the money that
would flow in to the country through new
According to Gunawardena, an increase in the
country's foreign reserves would prevent any
need for the rupee to be devalued. He said
that the rupee has been allowed to
depreciate according to market forces.
Referring to the currencies of other
countries in the region, especially India,
Gunawardena said that even the Indian
authorities did not artificially devalue the
currency but allowed market forces to
determine its position.
Rupee was devalued
The first time the rupee was devalued was in
1977 during President J.R. Jayewardene's
tenure in office. The rupee at the time was
devalued by then Finance Minister Ronnie de
Mel. The rupee that stood at 8 to the dollar
was devalued overnight to 16 to the dollar.
The next instance was in 2000 when the rupee
was allowed to free float during President
Chandrika Kumaratunga's tenure.
The then PA government announced that it
would let the rupee fall against the US
dollar in a bid to boost the country's
The devaluation of the rupee came when an
increase in defence spending was
experienced, as the government sought to
bolster the armed forces in the war against
"The Central Bank has now decided to allow
the market further freedom to determine the
exchange rate . . . the spread between its
buying and selling rates for the US dollar
will be widened to 5% (from the earlier
2%)," the Central Bank of Sri Lanka said in
a statement in 2000.
Then Central Bank Governor A.S. Jayawardena
told journalists he expected the rupee to
lose up to 4% of its value.
"We consider this to be a desirable band
which will help stabilise economic activity.
Exporters will gain. We expect the balance
of payments to improve by around $150
Analysts said the announcement followed
increasing pressure on the currency as a
result of the worsening balance of payments
While defence expenses increased in 2000,
exports saw a steady decline, leaving the
government with a trade deficit of nearly
US$ 2 billion.
had an overall balance of payments gap of
US$ 263 million in 1999 and a current
account deficit of US$ 495 million.