Sri Lanka which depends heavily on imports, needs to keep a close tab on the devaluation of the Rupee as it will reach Rs.160 very soon if measures and controls are not in place, Ceylon Chamber of Commerce, Import Section, Chairman Dinesh de Silva told the Business Observer. He said the Rupee devaluation against US Dollar (USD) and the country’s inflation have a close relationship.
“We have already observed the Rupee depreciating against the USD in the recent past and now it is a little above Rs 150. Sri Lanka is an import dependent country and needless to say how important it is to have the rupee conversion rate close to the USD or appreciate the rupee against the dollar,” he said.
“However, this is easier said than done. It is inevitable to keep the inflation low when the rupee is depreciating against the dollar as Sri Lanka needs to pay more rupees for the import of essential goods, food items, fuel, construction materials, raw materials and many more goods,” de Silva said.
The Rupee has depreciated by around three percent since the past month to around 151 against the USD. It has been speculated by financial analysts that it would devalue to around 160 against the USD mid this year.
De Silva said we should look back and reflect what measures should have been taken last year to stabilize the stable the rupee to face the new year. As predicted, this year will be one of the most challenging years.
“We have to increase the volume of exports to compete in the global market. Improving the ease of doing business, a simplified tax system and substantial benefits to exporters are key factors to boost exports while encouraging SMEs and new exporters to enter the industry. A simplified low tariff structure and stability in the exchange rate are essential for importers and exporters,” he said.
He said the country needs to focus on attracting more quality FDI’s in to the country while being competitive in the export market. Trade facilitation is a vital component to bring in changes to the regulations such the Import and Export Control Act, Customs Ordinance, Exchange Control and Tax laws including the SLPA Act.
“We cannot ignore the behaviour of the players in the global economy. The situation in the US with the new regime needs to be watched carefully. Then the opportunities and effects of FTAs with India, China and India will be critical in the coming year. While facing external challenges,we need to manage the internal factors as well. Managing the cost of living, political stability, addressing unemployment are major concerns the policy makers will need to look to accelerate growth in the country,” de Silva said.
JB Securities (Pvt) Ltd., Managing Director Murtaza Jafferjee said there has been a strong dollar theme since the US presidential election last year indicative of a sharp upward movement in the dollar index (index of the value of the USD against a basket of trade partner currencies. “The Sri Lankan Rupee still remains over-valued on a trade weighted basis. There is no pressure for the Rupee from the current account, as the deficit is expected to reach an all time low of two percent of GDP this year. Therefore, the pressure on the Rupee is due to sharp capital outflows from the financial account of the BoP, specifically FII outflows from the local currency G-sec market,” he said. He said the Central Bank’s willingness to allow the currency to be determined by market forces, as a means to preserve its forex reserves (quarterly floors for net international reserves is set out under the current IMF EFF program), while also ensuring the Rupee remains competitive compared to it’s trade partner currencies.
Former Ceylon Chamber of Commerce Chairman Chandra Jayaratne said the fall in the Sri Lankan Rupee in relation to the USD is reflective of the weakness of the macro economy and its inability to come out of the present challenges early and decisively. He said with the exports declining annually over the past decade and the ability to replace it with remittances from the workforce employed overseas, leaves the country constantly running a current account deficit and a budget deficit.
The way forward is to raise revenue and judiciously manage the budgetary expenditure and drastically reduce the budget deficit, encourage FDI and technology transfers, enhance the local value addition, and develop niche export links for goods and services (including logistics and ICT) with Asian countries especially India, China and Singapore and Vietnam to enhance the export base, develop human resource capability to match the FDI-led export of goods and emerging services options.
“These strategies will need deep structural reforms within a stable political base. However, they too cannot be relied upon to prevent the likely further fall in the Rupee value. The sale of non performing assets will not make a significant dent in the prevention of reserves falling further,” he said.