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Sri Lanka rupee has to depreciate a little more: CB Governor

Aug 04, 2017 07:45 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - Sri Lanka's rupee which has depreciated 2.5 percent against the US dollar so far this year generating domestic inflation has to depreciate a 'little more' for exporters to be competitive, Central Bank Governor Indrajit Coomaraswamy said.

"It has to depreciate a little more. We will do it in a very orderly way," Coomaraswamy told reporters Thursday.

Sri Lanka is depreciating the currency to maintain a Real Effective Exchange Rate (REER) Index around 100.

A REER index measures the depreciation of a currency against a basket of other currencies and adjusts it to published inflation data.

Sri Lanka's REER index which rose to 109.5 in January 2017 fell to 106.88 by June. Sri Lanka's rupee has depreciated 2.5 percent so far this year.

"It is not in the interest of the people or the economy to appreciate the currency," Coomaraswamy said.

"When you appreciate a currency you are subsidizing foreign producers. Politicians like that because there are many more consumers than producers. So a competitive exchange rate is crucial."

He said a 'competitive exchange rate' was needed to boost exports and also deal with Sri Lanka's debt problem.

Sri Lanka's targeting of the REER index is based on an idea that East Asian nations 'undervalued' their currencies.

US Mercantilists, such as those who now back President Donald Trump's ideological worldview, have charged for decades Japan and later China, have 'undervalued' their currencies boost exports.

But some classical-style economists have shown it is a demonstrably false doctrine, which is not clearly supported by real-world data.

Other than Philippines and Indonesia - which have been caught in depreciation-inflation vicious cycles like Sri Lanka - many East Asian nations have used so-called 'exchange rate fixity' to anchor inflation, they have said, with Hong Kong, Singapore, Macau and Brunei using actual currency boards with no policy rates. More flexible exchange rates were persued after the East Asian crisis, with some such as Korea moving to a near-floating rate like Japan.

With credit demand easing and the Central Bank no longer printing money to generate excess demand through the banking system, the rupee is no longer under pressure.

A depreciating currency improves 'competiveness' of exports primarily by destroying real salaries of workers and making it harder for them to make ends meet. Critics say depreciating currencies also destroy real capital available for investment making it harder to improve labour productivity. In Sri Lanka in addition to destroying wages, exporters also get a subsidy through utility prices, because they are not adjusted monthly to pass on the cost of curerncy depreciation.

 


 

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