Economy will not collapse, says CB Governor | Sunday Observer

Economy will not collapse, says CB Governor

7 October, 2018

There is a tremendous amount of misunderstanding regarding the exchange rate prevailing in the country and if people continue to hold a wrong opinion and panic, the country will not be able to come out from this situation, Central Bank Governor Dr. Indrajit Coomaraswamy told journalists at a media briefing to outline the Monetary Policy stance of the Bank last week.

The Sri Lankan Rupee depreciated 4.7 percent last month and 1.2 percent in the previous month. The Rupee has depreciated by 9.7 percent against the Greenback so far this year.

“As I have been saying on many occasions that the depreciation of the rupee is not the end of the world. Some think that when the currency gets devalued the economy will collapse. This is an unusual way of thinking. If that is the case many economies would have collapsed by now. We need to get our thought correct on this,” the Governor said.

The Indian Rupee is one of the worst performers in Asia losing its value by 12 percent followed by the Indonesian rupiah nine percent so far this year.

The Japanese Yen dropped to its lowest value against the Greenback since mid this year at 112.16 and the Chinese Yuan lost 45 basis points to 6.8554 against the US Dollar last week. The local currency hovered between Rs. 169 and Rs. 170 against the US dollar last week.

Opinions of financial experts and analysts has been proved wrong with the Dollar recording its strongest level in 13 months despite a trade war and steps to curtail free market activity which experts say is bad for a currency.

Since the dawn of the year, the US Dollar has appreciated over 5 percent against the Euro and the British Pound and over 7 percent against the Australian and New Zealand dollars.

Tight monetary policy conditions are observed globally with the continuous strengthening of the dollar. The US Fed raised short term interest rates for the third time this year and signaled further rate hikes with one more in December followed by three hikes next year.

The Central Bank had decided to keep its key policy rates unchanged due to relatively slow growth and persisting output gap, tight liquidity conditions in the market and inflation being within target.

“Interest rates were kept unchanged to protect the rupee. Other countries have used their interest rates to keep the currency stable. The difference is that some of these countries are strong economies,” the governor said. The Bank of England (BOE) increased its policy rate by 25 bps to 0.75% in August 2018.

The European Central Bank (ECB) is expected to end its asset purchase program by end 2018 and consider the first deposit rate hike by summer 2019.

The Bank Indonesia increased its benchmark 7-day reverse repo rate by 25 bps to 5.75% on 27 September 2018 (fifth rate hike so far in 2018). The Philippines Central Bank raised its benchmark interest rate by 50 bps to 4.50% on September 27, 2018 (fourth rate hike in 2018). The RBI raised its benchmark policy repo rate by 25 bps to 6.50% on 01 August 2018 (second rate hike in 2018).

In line with the Fed fund rate hikes, US Treasury Yields have increased. In response, Emerging Market Economies (EME’s) with pressure on local currencies have tightened their monetary policy stance by raising policy rates. Tight conditions have accelerated capital outflows from Emerging Economies resulting in depreciation of local currencies.

However, the Central Bank has been blamed for not being proactive to curtail the rupee sliding further. The delayed interventions by the Central Bank in terms of monetary policy and fiscal policy by the government have been blamed for the drastic dip in the exchange rate. The trade deficit continued to expand during the first seven months as import growth outpaced export growth.

“The Central Bank along with the government introduced a raft of policy measures to reduce the pressure on the exchange rate,” the governor said.

The imposition of 15 percent Customs duty on gold imports, upward revision of taxes on small vehicle imports, imposition of 100% margin deposit on LCs for the importation of vehicles for non-commercial purposes, suspension of vehicle permits, reduction of the Loan to Value (LTV) ratio from 70 to 50 percent and the 100 percent cash margin on selected nonessential consumer goods are some of the measures taken curb outflows.

The governor questioned what could one expect by increasing interest rates. Can we get foreign investors to come and invest and incentivise them to remain in the country?

“What happened in 2015? Around Rs. 3.2 billion was pumped in on a net basis but the currency was in a much worse position. As of October 2 we have put Rs. 184 million on a net basis,” the governor said.

However, the Central Bank is optimistic of a four percent economic growth rate this year despite the downward revision of the growth rate to 3.8 percent this year by the Asian Development Bank and the International Monetary Fund.

The economy is expected to expand during the remaining quarters of the year at a rate higher than the first half of 2018. The economy grew by 3.7% in the second quarter this year backed by the recovery in agricultural activities, services supported by the expansion in financial service activities and wholesale and retail trade and growth in industry buoyed by manufacturing activities. 

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