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Sunday, 25 March 2012

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Floating of Rupee, the need of the hour

The exchange rate of the Dollar will stabilise somewhere below Rs.125 assured Treasury Secretary, Dr. P.B. Jayasundara last week. He defended the exchange rate policy of the Central Bank and said that it reflected the economic situation in the country and macro economic management policies of the Government.

He explained the rationale behind the exchange rate policy of the Government. There was rapid expansion in the economy in 2010 and 2011.

The economic growth rate was high and inflation dropped from over 20 percent to 4-5 percent. In early 2011, large investments such as Shangri- La came together with an IMF standby agreement facility.

The dollar inflow increased. In the first four months of 2011 there was no sharp drop in foreign reserves and the dollar exchange rate was stable.

However, in the second quarter of the year, crude oil prices increased sharply and it exceeded $90 per barrel in September/ October and as a result the trade deficit widened. Import growth was very high compared to export and trade deficit was increasing.

This is a result of the expansion of the economy and there were capital goods and intermediary goods imports.

Countries such as India depreciated their currencies during this period and there was a demand for depreciation of the Sri Lankan Rupee too.

From October 2011, foreign reserves began to reduce.

"Presenting the 2012 Budget we expressed concern over the devaluation of the Rupee and we recognised the need for adjustment.

In February this year, the Central Bank stopped intervening in the market. Whether we have delayed in devaluing the Rupee or not was only a matter of judgement," he said.

He pointed out that with the devaluation of the Rupee, the depletion of foreign reserves has been arrested and there is over $ 600 m savings over two months. This shows the power of the exchange rate in controlling imports and there is a sharp drop in imports, Dr. Jayasundara said.

Responding to a question on the UN embargo on Iran oil exports, Dr. Jayasundara said that Sri Lanka respects all international financial regulations imposed by the UN and therefore was looking for alternative sources to buy crude oil. Sri Lanka imports 60 percent refined oil and crude oil is needed to run the refinery and we will buy crude oil from other Arabian suppliers, he said.

He said that a huge trade deficit is a structural problem in the Sri Lankan economy. According to analysts, Sri Lanka was facing a balance of payments crisis with the trade deficit was ballooning to a record $9.74 b in 2011, nearly double the deficit of $5.2 b in 2010.

Dr. Jayasundara said that various incentives have been given to exporters and local industrialists to import and for substitution industries to address this issue. The devaluation of the Rupee is the best incentive for exporters, he said.

 

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