CB has duty to act as shock absorber - CB Governor

Loss of external reserves in the last few months in the attempt to maintain a stable exchange rate was justified by Central Bank Governor, Ajith Nivard Cabraal adding new thought to the debate over the exchange rate policy of the country. “We gathered reserves to use at tough times. This is similar to ants gathering food for use in the winter and some people don’t know this”, he said.

We think ahead, planned and we spent reserves to maintain a stable exchange rate. It is better to learn from ants, rather than from books written by some pundits.

The Central Bank has a duty to act as a shock absorber and facilitate the economy to face shocks. We did it to help you to maintain your businesses without disruption at tough times”, Cabraal said at a Directors’ symposium of Non-Bank Financial Institutions in Colombo.

The exchange rate policy of Sri Lanka is a debatable issue and sudden non market devaluation of the rupee last week at the 2012 Budget was a surprise move. Governor Cabraal strongly argues for maintaining a stable exchange rate despite it appreciating sharply against the US dollar and many currencies.

This was also a debate between the IMF and the government that delayed final tranches of the $ 1.27 billion SBA loan facility to strengthen the external reserve position of the country that was dropped to just enough to cover one month import in mid 2009.

The CB intervened in the market, pumping millions of dollars as a routine exercise to stabilise the exchange rate.

After 3 percent devaluation of the rupee in the 2012 Budget last week, Cabraal said that President Mahinda Rajapaksa assured that there won’t be any more pronouncements of the depreciation of the rupee or devaluation. Cabraal has said that this 3 percent devaluation is a one-off thing.

Although exporters and the IMF welcomed the depreciation, the cheap rupee could pose a negative impact on public debt and inflation.

The net impact will only be positive if export growth could offset the negative impact on public debt and the staggering oil bill. Cabraal, had pointed out the negative impacts of depreciation.

With the devaluation of the rupee, public debt has increased by Rs.74 billion and oil bills by Rs. 11 billion. Therefore, others have to pay for the depreciation, he told at a post Budget seminar.

- GW