Rupee depreciation in line with targets

Dollar over Rs. 112: - CB Governor

by Gamini Warushamana

The Sri Lankan rupee depreciation is in line with the targets and there is no unusual depreciation, Central Bank (CB) Governor Ajith Nivard Cabraal said.

Cabraal was responding to opposition claims over a crisis in the Sri Lankan economy at a media briefing in Colombo last week, together with senior CB officials.

CB officials said that the floating exchange rate regime has increased the Sri Lankan rupee's resilience to external shocks. During 2001-2004 the rupee depreciated by 5.9% and in 2005 the rupee appreciated by 2.4% due to tsunami funds' inflow. In 2006 it depreciated by 5.2%. In 2007, so far the rupee has depreciated only by 3.8% and it is in line with the CB target, they said.

Cabraal said that the depreciation of the rupee is not a sign of an economic crisis. If this argument is true the US economy should be in a deep crisis, because in 2006 the US Dollar depreciated by 13% against the Euro and 11% against the Sterling pound, he said.

CB officials also said that inflation is also under control and there is a sharp decline in the inflation rate from 20.5% at the beginning of the year to 13% today. Inflation increased as a result of the removal of subsidies in a strong domestic demand environment.

The Monetary policy in 2006 was focused on containing inflationary pressures and to facilitate the continuation of the growth momentum.

The removal of subsidies is a demand management policy to cushion the external shock. Inflationary pressure emanating from this subsidy removal, increased domestic demand and international prices of some imported items. Further tightening of monetary policy is required. Key policy rates were raised four times in 2006 and once in 2007.

The CB has no control over external price increases and the best way is passing on the price increase to consumers. Subsidies would fuel inflation in the long run. External price increases do not generate long run inflation.

We do our job well controlling the monetary expansion. As predicted, in July inflation should be higher. At the beginning of the year the CB sets targets and we are achieving all targets, CB officials said.

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