"The Central Bank’s interventions in the market for this year have resulted in a net buying of dollars amounting to US$ 329 million," the Chief Economist of the Central Bank, Dr Nandalal Weerasinghe said. "And this has gone a long way to prevent the rupee from appreciating to as low as 103 to a dollar.’ Dr Weerasinghe said the exchange rate was not propped up as some exporters believed it to be but that market forces determined its rate. Exporters said that the exchange rate did not reflect the trade balance as foreign remittances, investments, grants and aid increased the supply of foreign currency thereby causing the rupee to appreciate. "It is not only trade that determines the exchange rate, but as economies become much more complex and integrated with other countries and regions, the above factors also determine the exchange rate," Dr. Weerasinghe told the Island Financial Review. "The exchange rate is determined by market forces and the Central Bank does not determine what the rate should be," he said. He said the Central Bank only intervenes to smoothen out extreme fluctuations. "The export sector is an extremely important component of our economy and it has to be nurtured and that is why the Central Bank has been buying more dollars from the market than selling because the trend has been for the rupee to appreciate." Depending on the demand and supply of dollars the exchange rate could fluctuate rapidly to either appreciate or depreciate. If the rupee is seen to be appreciating too fast, the Central Bank steps in to mop up the excessive dollars. It sells dollars if the rupee nose dives. Dr Weerasinghe said that although the Central Bank intervened when extreme fluctuations occurred, the bank was not mandated to control the trend in which way the exchange rate was being pushed by market forces. The acquisition of AMW shares by Al Futtaim Engineering LLC early this week had helped to create a situation in the market where dollars were in excess and during the last three days (Monday to Wednesday) the Central Bank brought up US$ 86.5 million. Al Futtaim acquired a 71.15 percent stake in AMW for Rs. 6.91 billion when it purchased 39.6 million shares at Rs. 174.5 a share. A mandatory offer was announced at Rs174.5 a share. Interest rates, inflation (28.2 percent in June), high energy costs and labour costs are other factors that squeeze margins and make our exports less competitive. The Central Bank is pursuing a tight monetary policy in a bid to curtail domestic credit growth and mitigate inflation’s upward trend, nearing 30 percent. The resulting high interest rates have increased financial costs. SMEs find it difficult to meet working capital requirements while larger companies see their bottom lines shrink. The private sector had been lobbying for a reduction in interest rates so as to facilitate growth, especially of the SME sector. |
