Sri Lanka in a daze, as rupee slides inexorably

Ulhas Joglekar ulhasj at SPAMbom4.vsnl.net.in
Fri Feb 2 16:18:07 MST 2001


Monday
29 January 2001

Sri Lanka in a daze, as rupee slides inexorably
COLOMBO: Trader and consumer alike are in a daze in Sri Lanka for the last
few days after its central bank put its currency on a free float against the
dollar, as the rupee nosedives and prices shoot upwards inexorably in a
country that imports most of its requirements.
A costly war in the north, the continuing effects of international fuel
prices and wild speculation in the exchange market contribute to the
country's economic woes, as the government waits in anticipation of higher
exports, increased foreign exchange inflow and the rupee stabilising at its
'real value' after the initial shock.
When the central bank announced on January 23 that commercial bank would
henceforth be free to determine the rupee's exchange rate against the
dollar, it was the culmination of seven months of moves to liberate the
currency.
Since June last, the central bank has been widening the trading band between
buying and selling rates, the latest one earlier this month allowing a 10
per cent band that took the dollars's value beyond the 80 rupee mark.
Banks reacted predictably after the rupee was allowed to float, each quoting
a different, higher rate against the dollar, taking the intervention US
currency's value close to Rs 95.
In effect, the rupee's value has plummeted from around Rs 75 to the dollar
in October to Rs 95 now, but experts and the central bank feel it will
stabilise soon at around Rs 90.
In the bustling pettah market in Colombo, traders are complaining of a
dramatic downfall in business in last few days.
Import orders are being postponed and wholesale traders cannot decide exact
prices for their products, but the retail trade merrily jacks up prices,
leading to the public being scared away from the market.
"Business is down. We are unable to decide the price and people are scared
to buy," a traders' association chief K Palaniyandi said.
The opposition questioned the timing of the free float decision. United
National Party leader Ranil Wickremesinghe said it came at a wrong time. "To
allow the rupee to float, there ought to be a stable economic background and
a proper plan," he said, adding cost of living would rise beyond the skies.
The International Monetary Fund welcomed the move, saying it was "in keeping
with the broader reform agenda of the government," and a "timely" action
that had been well received by the market.
Eminent economist J B Kelegama wrote that he saw no advantage in placing the
rupee on a free float. "In allowing the market to have a greater say in
determining the exchange rate, the central bank has virtually surrendered
its authority to the market," he commented.
Sri Lanka's importers were very forthright in their criticism of the
decision to free float the rupee, as imports will be the first casualty.
"This shock treatment will contribute more to inflation and destablise the
economy," ceylon chamber of commerce import section chairman D J A
Abeysekera said, noting that the rupee has been devalued by 23 per cent in
the last one year.
Sri Lanka spends a third of its budget on defence, with a seemingly unending
war consuming about $1.04 billion in 2000. It is a country of high interest
rates and a huge import bill that touched $6.52 billion in the first 11
months of last year.
It has a balance of payments deficit of over $500 million, and only an
anticipated surge in exports and the return of export proceeds accumulated
abroad can ease the pressure on the economy, feel analysts.
It is the drain on the country's foreign exchange reserves that sparked the
"downward adjustment" of the exchange rate, the central bank said in a
statement.Despite a good economic performance last year (GDP growth was six
per cent), the crude oil import bill went up unexpectedly by $400 million
and escalation of the war cost an extra $200 million.
Commenting on the first days of currency trading, the IMF office here
said:"the market absorbed the change in the system well and trading took
place at a rate that appears to be in keeping with the demand and supply of
foreign exchange."
However, many could'nt agree with the initial assessment, as the rupee
floundered erratically, with banks pricing the dollar at anything between Rs
90 and Rs 97 after a couple of days, sparking fears that it may cross Rs 100
next week.
Central bank officials feel the erratic behaviour is only an aberration
before the market fully adjusts itelf, but also warns against speculative
trading, with its governor, A S Jayawardena stating the bank was ready to
intervene whenever the speculation went out of hand. (PTI)
 For reprint rights:Times Syndication Service








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