Has the rupee actually strengthened versus the falling dollar? | Sunday Observer

Has the rupee actually strengthened versus the falling dollar?

12 March, 2023

At the end of the week according to the daily exchange rates issued by the Central Bank of Sri Lanka the purchase price of one US$ was recorded as Rs. 307.36 while the selling price was marked as Rs. 325.52. Today the majority are of the opinion that when the value of the dollar decreases, the rupee becomes even stronger which signifies a positive turn of the economy. But is this a reality or a mere fallacy? The Sunday Observer spoke to several key experts in the subject to elicit their opinion on the phenomenon.

Prof. Ven. Wijitapure Wimalarathana Thera, former Head of the Department of Economics at the University of Colombo and President of the Sri Lanka Economists’ Association

“The value of the rupee is determined by demand and supply. The value of the rupee has been gradually increasing since recent times. The increase in dollar reserves, the upcoming IMF subsidy, tourism, and foreign labour income have affected the increase in dollar reserves. Because of this, those who were hoarding dollars are now exchanging it. Due to this, the value of the rupee may increase further.

As the value of the rupee increases against the dollar, the prices of goods brought from abroad should gradually decrease. It is a great relief to the people. The concessions given to the exporters, who had benefited greatly in the past, are now gradually decreasing. Now even foreign workers are starting to send their money through legal channels to Sri Lanka. Inflation is also starting to drop. But if the import restrictions are eased in some way, the value of this rupee will decrease in some way.

This situation is a good sign for the economy. However, to bring the economy back to the previous state, exports must be promoted. We are still waiting for loans. This kind of situation arose because we did not engage in export promotion then. After Independence, we had no strong currency or foreign exchange system. We have not learned a lesson from it. Exports should be increased in the future. It should be discussed with the exporters. Foreign investments should be brought in. We should negotiate with foreign investors.”

Senior Prof. Sirimal Abeyratne, Department of Economics, University of Colombo

“I see this situation as being temporary. The weakening of the dollar and stabilisation of the rupee is temporary because of speculation that the loan money related to the agreement with the IMF will be received this month. It is this fact that has contributed to the strength of the rupee. Several other factors also contributed to it. The country’s receipt of dollars through tourism and foreign workers has increased this month.

The Central Bank of Sri Lanka (CBSL) did some easing last week. Due to these factors, the rupee became stable and the dollar strengthened. But we still have not started the work to earn the dollars needed to stabilise this situation in the country. So this is only temporary. In order for it to be stable, export promotion should be done in our country. If we are unable to generate the required dollars, devaluation may occur. Changes in the dollar affect both long-term and short-term volatility. In the long run, the dollar depreciated from 1978 until now. This depletion is a long-term phenomenon. This is unusual. Because we are weak in terms of export promotion the dollar fluctuates. I include this situation in that category. By receiving the IMF subsidy, we will be able to get more loans in the future. But if you continue to accumulate debt, this is pointless. It is necessary to improve our international image, increase investments and move to a manufacturing economy.”

Prof. Navaratne Banda, Head of the Department of Economic Studies, University of Kelaniya

“Import restrictions have been imposed in the country. Then our cost is less. Our export income remains. There is a decrease in the amount of dollars demanded even in the increase in the interest rate. Then there is an increase in reserves. Accordingly, a decrease in the value of the dollar may be shown. This decrease is good to some extent. But this is not a big change. In order for the dollar to decrease, at least it should decrease to 300 rupees. Then it can be said that there has been an advantageous situation to a certain extent.

We should encourage our manufacturing, tourism and foreign employment more than saying that the rupee is strong. Currently, the Government has imposed a large number of import restrictions. Although we should develop our exports and develop the tourism industry, the arrival of tourists is important only if they come from Western European countries. Then you get a lot of dollars.

In order for the rupee to strengthen, a program to further strengthen the economy is needed. We will have no problem with the dollar if we can focus on domestic agriculture, small and medium-scale agriculture, increase the quality of exports and manufacture industrial goods. We are still in a raw material exporting country. Our economy should be brought to the level where the international community demands goods from us. We should work honestly for the country. Popular decisions should not be taken for the sake of elections.”

Prof. Wasantha Athukorala, Department of Economics and Statistics, University of Peradeniya

“Never in the history of Sri Lanka has the rupee strengthened in this way. In some years there was a surplus of US$ 2-3 billion in the balance of payments. A large amount of foreign exchange was brought into the country. But the rupee has never strengthened in this manner so why has this suddenly happened? This is an artificial process. We cannot buy dollars from the market as we want.

The supply of dollars has increased from the tourism industry and foreign remittances. The purchase of the dollar has been fully controlled and the supply of dollars has gradually increased. Economically speaking, there is no reason for the increase in supply to strengthen the value of the rupee in this way. In this situation, the CBSL strategically increased the supply of dollars and controlled the demand to strengthen the rupee. It was intentional. Through this the value of the rupee dropped from Rs 362 to Rs 307. The dire consequences of this may occur by the end of this year.

At this point the exporter may become discouraged while importers will be encouraged. The amount of goods imported from foreign countries may increase and the amount of goods sent abroad may decrease. Due to this, the balance of payments is moving towards a deficit. This is an uncertain situation. The strength of the rupee was not due to the Sri Lankan economy becoming strong. Because of this, money sent to Sri Lanka may stop. Then the amount of foreign exchange coming into the country may decrease.

Due to the devaluation of the rupee though the number of tourists coming to Sri Lanka will increase for a short period of time, but in the future, due to the strengthening of the rupee, there may be a decrease in tourist arrivals in the long term. In building economic policies, economic variables should be changed systematically. Thus, in a short period of time, the decrease of the dollar and the strengthening of the rupee is something that has happened artificially. Had this change happened gradually, it would have been better for the economy.”

Senior Lecturer, Faculty of Economics, University of Peradeniya Dr. Priyanga Dunusinghe

“We expect the rupee to strengthen further. It is imperative that the rupee strengthens with the arrival of more tourists and increased remittances. The IMF loan will also raise our forex portfolio.

The strengthening of the rupee is a culmination of several factors. We have to remember that now we are not repaying bilateral loans and also that import restrictions will have to be eased at some point. Indeed, if more dollars are available, we have to permit more imports. But this could lead to the depreciation of the rupee. Still, the appreciation of the rupee is a good omen. If this can be made sustainable, import restrictions can be eased, interest rates can be decreased and the economy can be expanded. But for all this to happen, socio-political stability is important. All should help the Government to maintain this momentum. Rs.300 will be a good point for the rupee to stay in relative to the US Dollar.

Politics Economics Prof. Sumanasiri Liyanage

“The dollar weakened in the world market, which is one factor for the rupee’s appreciation. The fuel rationing system helped curb the demand for dollars as the fuel demand has reduced by 40 percent. The true figure for the rupee is to be in the 280 to the dollar range. The large gap between the buying and selling rates of the dollar is a cause for concern. Earlier this used to be only around Rs.2-3.

If the rupee strengthens, we will have to pay less for imports. However, the exporters will get less in rupee terms. This will lead to a difficult situation for them. The Central Bank should step in and maintain the rupee at around Rs.300 to the dollar. It is a good sign that both tourist arrivals and expat remittances have increased. The IMF facility will be good for the economy.”