The Central Bank Governor, Ajith Nivard Cabraal, defended the floating exchange rate, which many exporters believe to be artificially propped-up, and said the bank was doing a balancing-act on a shaky platform in a bid to sustain the economy of the country buffeted by adverse global economic conditions and an internal war. Cabraal defended the relatively robust rupee and highlighted a few examples where the country lost out on a depreciating rupee when he addressed the private sector at the Sri Lanka Economic Summit organised by the Ceylon Chamber of Commerce last week. "We have generally assumed that it is good to allow the exchange rate to depreciate in order to allow our exports to be competitive, and to discourage imports. Maybe this happened according to what was prescribed by the IMF and the World Bank for the management of the exchange rate. But, what else happened in the process," he asked. "Out of our external public debt of Rs.1,295 billion as at 31st March 2008, Rs. 620 billion or 48% or nearly US$ 6 billion of external debt has arisen only due to the rupee depreciation. In fact, a huge additional debt burden has been "created" without a corresponding asset." He said that this artificial "creation" of debt amounted to more than the government’s revenue collected last year. "In other words, this amount is enough to construct 15 Hambantota Ports, or construct 30 Southern Highways, or pay the entire government salary and pension bill for 2 years, or pay the salaries of the entire armed services for 10 years." He said that it was a mistake to have allowed the exchange to depreciate on the assumption that gowth will be driven by exports. "The exchange rate policy should be revised and said it would cost the country dearly to allow the exchange rate to depreciate. Instead of waiting for the exchange rate to depreciate so that competitiveness could improve, the export sector should instead focus on improving productivity to improve its competitiveness," he advised. He said that productivity in the 1.2 million government sector and 6 million private sector workforces should be made to appreciably increase by 7 to 10 percent each year for the next 5 years. "If we do so, we can comfortably maintain the exchange rate at the current level and lessen the impact of imported inflation," he said. "By increasing our milk production from the present 200 million litres to 1 billion litres, about 75 percent of the country’s requirement and increasing our sugar production from 55,000 metric tons to 350,000 metric tons which is 60 percent of our requirement, we can save at least US$ 250 million and help our exchange rate maintain its value." He also touched on inflation and high interest rates and argued that tight monetray policy was needed to curtail domestic credit in order to stifle demand-push inflation but not so tight as to erode economic growth. The ongoing war and insecurity in the country contributed to the pounding of global oil and food prices on the economy. Cabraal compared the Central Bank’s role to a juggler, juggling several balls, on a shaky platform. "We need to look at the long term optimum results. People do not look at the bigger picture. They do not look at all the variables. You may have to put your own interests behind you for the sake of national interests," he told the private sector. "As you have in the past, you certainly can come through these tough times and you will," he told them, commending the legendary resilience of the private sector. |
