Lanka Rupee US exchange rate defies adverse expectations

BOP surplus for 2007 at US 550 m:

The Sri Lanka Rupee to the United States Dollar (USD) exchange rate closed at 108.72 as at the end of 2007, when compared with the exchange rate of 107.71 per USD which prevailed as at the end of 2006, thus reflecting a depreciation of less than 1%, during the year.

This depreciation was substantially below some of the adverse expectations that prevailed in the market, based on certain claims of a few analysts. It was also substantially below the depreciation of the rupee experienced during the year 2006, which was 5.2 %.

At the same time, the Sri Lanka Rupee depreciated by approximately 2.7%, 11.7%, and 6.8% against the GBP, EUR and Yen, during the year 2007. Such depreciation is likely to have allowed Sri Lankan exporters to maintain their competitiveness in trading activities with those countries, since those currencies appreciated substantially against the USD during the year 2007.

The marginal depreciation of the Rupee against the USD during the year is mainly due to the large inflows of foreign exchange, particularly attributable to higher exports, remittances and other debt and capital inflows. As a result of such inflows, the official reserve position is estimated to have increased to USD 3,080 million as at the end of 2007, substantially higher than the USD 2,526 million that prevailed as at the end of 2006.

In terms of import coverage, the year end reserves are estimated to have improved to 3.3 months of imports from 3.0 months of imports. The surplus in the balance of payments in 2007 has also been estimated to have increased to USD 550 million from USD 204 million as recorded in 2006.

Sri Lanka's average inflation for 2007 reached 15.8% compared to 10.0% for the year 2006 as per the new Colombo Consumer Price Index. The increase in inflation, particularly during the second half of 2007, was due to the sharp escalation of commodity prices in international markets.

According to the information released by the Department of Census and Statistics, price increases of imported items contributed to more than 25% of the average inflation figure in 2007.