Expansion in exports backed by a vibrant manufacturing sector that promotes value added exports and slashing unnecessary consumption are key to address the weakening currency which is adversely impacting the trade balance and causing inflationary pressure, economists said.
In the same vein economists said sustained export growth requires foreign direct investments (FDI) an area that needs urgent attention.
Professor in Economics of the University of Colombo, Sirimal Abeyratne said growth can never be at a “sustainable higher rate” without export expansion.
However, without export expansion the exchange rate is on a long term downward path and is vulnerable to dollar appreciation. Therefore, export growth is a persistent challenge for Sri Lanka which continues to date. A major breakthrough in export growth requires investment so that the fundamental question remains to be answered “why investors are reluctant to invest in Sri Lanka?”
Former Central Bank Deputy Governor W.A. Wijewardena said the country needs to cut down on consumption to slash imports which is double the size of exports. Reduction in consumption similar to what Malaysia did in 1985 and in 1997 when it faced a currency crisis is crucial to dampen the impact of a weak currency in the country. Restructuring the manufacturing sector for value added exports need at least three to four years of lead time and had that taken place three years ago the country would have reaped the benefits today.
He said the rupee has been on a downward trend since independence and added that the rupee which was Rs. 4.76 against the US$ in 1948 is today Rs. 162 against the greenback.
The weak rupee widened the trade balance to $ 760 million in July this year. Despite the revival in exports reaching US$ 11.4 billion last year and surpassing imports for the first time in May this year the trade deficit has been widening throughout the year.
The rupee has weakened by around 5% so far this year, 2.5% last year and 3.9 % in the previous year. IPS Economist Kithmina Hewage said it is important to look at the depreciation of the rupee in context. The depreciation is not specific to Sri Lanka and is driven mainly by the strengthening of the US dollar due to increases in interest rates by the Federal Reserve.
Consequently, many frontier and emerging market currencies are facing an outflow, leading to depreciation. In fact, the Sri Lankan rupee has depreciated lesser than other emerging economies such as India Pakistan, Indonesia and Turkey. That said, the recent depreciation will have implications for the economy. Imports into Sri Lanka have been increasing in recent years and the depreciation of the rupee is likely to exert inflationary pressures on the economy since it increases the cost of imports. Moreover, the cost of borrowing and debt repayment will rise as well.In order to insulate itself against such external shocks or at least make it less vulnerable, it is vital that the Sri Lankan economy strengthen its export earnings whilst also creating a more conducive business environment that can attract FDI (Foreign Direct Investment), especially in tradable sectors.