‘Falling Rupee doesn’t mean a crashing economy’ | Sunday Observer

‘Falling Rupee doesn’t mean a crashing economy’

23 September, 2018

Senior Deputy Governor of the Central Bank, Dr. P. Nandalal Weerasinghe last week strongly refuted the notion that the depreciation of the Sri Lankan currency against the US Dollar was an indicator of a collapsing economy.

The Sri Lankan rupee weakened to record all-time lows during the past week and closed at Rs. 168.63 per dollar on Friday.

“If that logic is true, then the Indian economy which is growing at almost 7% while its currency is depreciating higher than Sri Lanka must by now have collapsed too,” Central Bank’s Deputy Governor countered.

While the Sri Lankan Rupee has depreciated by 9% to the US Dollar from January 1st 2018 to September 18, 2018, the Indian Rupee has weakened by 13.5%, Pakistani Rupee by 12.1%, Indonesian Rupiah by 9.5%, Russian Ruble by 18.2%, Brazilian Real by 24.8%, Turkey Lira by 68% and Argentina Peso 112%. Given the cross currency exchange rate movements, the Sri Lanka rupee depreciated against the Euro (7.8 per cent), the Sterling Pound (7.8 per cent) and the Japanese Yen (9.2 per cent) while the Indian Rupee appreciated (2.2 per cent) during this period.

Noting that currency depreciation was mainly due to external global developments where the US Dollar is strengthening, Deputy Governor Weerasinghe cautioned that Sri Lanka would lose out on competition with regional peers like Indonesia, Philippines and India, if it artificially kept the Rupee strong by defending the currency.

“A certain level of depreciation will help maintain and encourage our competitiveness for exporters and domestic producers. But on the flip side, as prices of imported goods will increase it does discourage imports,” Dr. Weerasinghe, who serves as the Chairman of the Monetary Policy Committee and the Foreign Reserve Management Committee of the Central Bank of Sri Lanka, said.

Meanwhile, burdened by the challenging domestic and exogenous economic conditions, the Colombo Stock Market breached the 6,000 points psychological level to hit a 30 month low last week.

During the week, the benchmark All Share Price Index lost 126 points or 2.1% to close at 5,905 points while net foreign outflows amounted to Rs. 743 million.

“Foreign investors continued to trim their equity exposure throughout the week in tandem with the global exit strategy from emerging markets,” a stock market analyst told the Sunday Observer.

However, on the macroeconomic front, Sri Lanka’s Gross Domestic Product for the second quarter of 2018 has improved to 3.7%, a marginal rise from the first quarter growth of 3.5%, the Central Bank announced.

Meanwhile, Governor of the Central Bank, Dr. Indrajit Coomaraswamy said the reason why the Central Bank is not presently defending the Rupee more aggressively as was the case in the past, was due to the bitter lessons learnt both in 2011 and 2015.

“During 2010-2011, the Central Bank spent US$ 4.2 billion to defend the currency and in the end had to depreciate by 13.5% anyway. Even under this government in 2015, the Central Bank spent US$ 2.1 billion and then in the end, the Rupee depreciated by 9% anyway,” the Governor said. Hence, he noted that spending large amounts of Sri Lanka’s reserves to defend a particular rate is not feasible because in any case, the island would end up with a double whammy of highly depleted reserves as well as a depreciated currency.

For that reason, the Central Bank has been pursuing a more flexible exchange rate policy which has been more determined by the market, he said although acknowledging that Sri Lanka has so far spent some money to try to smoothen and reduce the pace at which the depreciation takes place.