Rupee depreciation not unusual - Central Bank

Sri Lanka's rupee depreciation against the US dollar continues and the dollar exchange rate hit the Rs. 110 mark on Monday. During the first half of the month the rupee depreciated by 0.62% against the US dollar.

However, the Central Bank said that the depreciation of the rupee is not abnormal and it is in line with the normal depreciation of the currency. Under the floating exchange rate regime the annual depreciation of the rupee is 5% and pre-floating it was around 8%.

Financial analysts said that the drop in foreign currency inflow as tsunami aid is one major factor for the depreciation of the rupee. By the end of 2004 the rupee was at a similar depreciation trend and it reversed with tsunami aid inflows and appreciated.

Analysts said that the large outflow of foreign exchange is another reason for the depreciation of the rupee. The high oil price, high defence expenditure and high commodity prices are the reasons for the foreign currency outflow. High inflation also increases demand for foreign goods and adds pressure on the exchange rate.

The impact of the depreciation of currency is diverse, analysts said. Exporters will be happy as Sri Lankan exports will be competitive in the international market. However, the impact on the garment sector, the main export of the country is minimal because most of the inputs are imported. Products where local value addition is higher (such as tea and rubber) will benefit.

The depreciation will also cause higher cost-of-living because the prices of all imported commodities will go up as a result. Over 50% of essential commodities we consume are imported, analysts said.

GW