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Depreciating Sri Lanka rupee without export growth is ludicrous: Finance Minister

COLOMBO (EconomyNext) – Sri Lanka will not devalue the currency in a bid to support exporters as the move will increase inflation without necessarily boosting exports, Finance Minister Ravi Karunanayake said.

He said Sri Lanka’s interest rates have been kept low to make it possible for exporters to invest more.

"We want to ensure the the export boom takes place," Karunanayake said. "Because until such time there is no point in having an open exchange rate. It is ludicrous.

"Why … should we have a devalued exchange rate which have an impact on the cost of living and you will have no reciprocity in exports?"

Minister Karunanayake’s comments came as the rupee is coming under pressure in forex markets due to low interest rates and liquidity releases into the banking system by the Central Bank which has triggered reserve losses as the liquidity is redeemed in forex markets.

Sri Lanka sharply depreciated the rupee in 2012 after the central bank generated a balance of payments crisis by keeping interest rates down with printed money while credit demand rose sharply due to state fuel subsidies.

Though the rupee fell from 110 to 130 to the US dollar, there has been no sharp increase in exports.

Export become price competitive after currency depreciation mainly due to impoverishing workers through a fall in real wages, but if external demand is weak, such impoverishment does not lead to higher export growth.

Exports fell from 10.55 billion dollars in 2011 to 9.77 billion dollars following depreciation of the rupee in 2012 and grew back to 1.39 billion dollars in 2013. The 2011 figures was exceeded only in 2014 in dollar terms amid falls in dollar commodity prices.

Analysts have pointed out that Sri Lanka’s protectionist policies meant that industrialists have got used to exploiting domestic customers with high prices and are not competitive or innovative to cater to other markets.

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Even where there are surpluses of basic agricultural goods such as rice, they cannot be exported due to bad quality which have been promoted by import tariffs.

Sri Lanka has suffered high inflation, ‘foreign exchange shortages’ and currency depreciation ever since a so-called soft-pegged Central Bank which try to control both inflation and exchange rate simultaneously was set up in 1952.

The central bank cut policy rates in April in the midst of balance of payments troubles on claiming that domestic inflation was low.

But economists have pointed out that a monetary authority that targets an exchange rate already has an external anchor (the pegged exchange rate) and cannot target a domestic anchor (inflation index) at the same time without rushing headlong into a balance of payments crises.