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
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
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.
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.