Rupee depreciation vital to face present economic crisis - Dr.
Saman Kelegama
by Gamini WARUSHAMANA
[email protected]
Dr. Saman Kelegama
|
Sri Lanka should depreciate the rupee to face the present economic
crisis, the Executive Director of the Institute of Policy Studies Dr.
Saman Kelegama told the Sunday Observer.
Here are excerpts from the interview.
Sri Lanka is feeling the impact of the US financial crisis spreading
across the world. However, this is mainly felt in the trade sector
rather than in finance.
The positive impact in the trade channel is the price decline of some
key imports of the country. Oil, wheat and sugar prices have dropped and
as a net food importer this price decline is beneficial to Sri Lanka’s
economy.
The oil price decline is especially crucial. The high oil price
aggravated our trade deficit and it is now cooling down. This will
create a more positive impact on our trade balance.
The negative impact is the drastic decline of tea and rubber prices.
With the declining commodity prices these prices too are on the same
trend. At the same time due to the recession in the US and EU economies,
the demand for these two products and apparel will drop.
At present, the GSP+ issue is in the balance. Therefore, the demand
decline for our apparel exports is also a major concern, because it
accounts for 43% of our overall exports. One way to face this situation
is to depreciate Sri Lanka’s rupee.
This is very important because all our competitor countries have seen
a depreciation of their currencies.
We have to seriously consider our exchange rate policy, especially
during this global economic crisis. When a decision is taken to
depreciate a currency several factors are considered and of them
inflation, export competitiveness and the burden of debt repayment are
the major areas relevant to us. However, there are trade offs.
Though the rupee depreciation has an adverse impact on the cost of
living, as the international commodity prices have come down, the
imported commodity price increase would not be that much in the current
environment.
Currency depreciation will definitely assist the export industries
which are facing a very turbulent time at this juncture.
The Sri Lankan rupee has appreciated significantly and as a result
our export competitiveness has eroded. The recently released IPS’s State
of Economy 2008 has pointed out that the real effective exchange rate of
the Sri Lankan rupee calculated against the currencies basket of 24
countries has appreciated by 6.5% in 2007 and by a further 8.5% from
December 2007 to May 2008.
The World Bank’s Country Assessment Strategy (CAS) released recently
said that the real effective exchange rate of the rupee has appreciated
by 25% since early 2000 eroding the export competitiveness of Sri Lanka.
The Rupee depreciation is very important at present for export
industries to be competitive to hold the markets, because the domestic
cost of production has gone up and industries are in a difficult
situation. Interest rates, electricity and wages have gone up while
cutting down of cost and productivity increase are limited.
In this situation the only option is to depreciate the currency or
else industries will have to gradually close down. If the debt repayment
is the concern against depreciation, a prudent debt management policy is
very important without depending on the exchange rate to cushion it.
With regard to finances, our financial system is not diversified and
sophisticated with a number of instruments and therefore it is insulated
from the global financial system.
In the banking sector, the amount of non performing loans is not
seriously high and is manageable. Therefore, there is no threat to our
banking system. All our leading commercial banks are performing well and
therefore there are no major worries.
The only concern is the high interest rates. As a result credit to
the private sector has substantially reduced. Once inflation comes down
serious consideration should be given to cut interest rates. |