In the Island Financial Review last Saturday (19), we said that "during the Sri Lanka Economic Summit held earlier this month, exporters voiced their concerns that the exchange rate does not reflect the trade balance." We went on to say that this was because the Central Bank intervenes when necessary by buying dollars in order to avoid extreme fluctuations in the exchange rate. This statement is incorrect and we regret the error. By buying dollars from the market, it would only depreciate the rupee and this is exactly what the exporters want. An official of the Central Bank told the Island Financial Review that the Central Bank had been intervening where necessary to avoid extreme fluctuations in the exchange rate. "But Central Bank has been buying dollars more than selling. This means that we are conscious about our exporters and have not allowed the rupee to appreciate too much," he said. He said that due to the inflows of foreign exchange in the past months, the rupee could have appreciated to as much as Rs.100 to a dollar, and had this happened, it would have been the "kidney punch" to many exporters. However, the rupee continues to be stable while inflation, exchange rates and increasing energy costs drive production costs up. The result is that exports from Sri Lanka lose their competitiveness. Central Bank Governor Ajith Nivard Cabraal said earlier this month that it was a mistake to have allowed the exchange to depreciate on the assumption that growth will be driven by exports. "The exchange rate policy should be revised and it would cost the country dearly to allow the exchange rate to depreciate," he said adding that inflation would increase along with the increase of import costs. "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 the private sector at the Sri Lanka Economic Summit. However, exporters feel that increases in productivity and even marketing would not bring tangible results. They believe in growth achieved the other way about by increasing export revenues which will drive up productivity and lead to more employment. Central Bank’s balancing act should no doubt be appreciated but as the governor himself says, hard decisions must be taken after considering the long term and the big picture. And in a way the exporters agree, only while being choked at the present, they want some relief to be able to contribute to real growth through what is produced in our good land. |
