Sri Lanka exporters should convert, rupee worth 185 to dollar: Minister Cabraal

ECONOMYNEXT – Sri Lanka’s rupee should be around 185 to the US dollar State Minister for Money and Capital Markets Nivard Cabraal has said urging exporters to convert dollar inflows without holding them back.

“I think the rupee should be around 185 to the US dollar depending on the macroeconomic factors,” Minister Cabraal said, speaking at a ruling party press conference this week.

Cabraal a former central bank Governor kept the rupee stable for several years, though after a fall in 2012, it was not allowed to appreciate when credit fell in 2013 and the central bank bought billions of dollars for its reserves, for reasons that are not clear.

Sri Lanka’s rupee fell sharply in over January 2021 after the central bank printed money and brought rupee interest rates below local dollar yields over the past year amid a credit downgrade which drove up dollar bond yields, making forward premiums negative and incentivizing importers to cover forward.

As exporters also unwilling to sell forward at a discount, banks bought dollars in the spot and near term market, using the printed money from the central which are sloshing around as excess liquidity to provide forward cover to importers, putting pressure on exchange rate.

Some exporters loaned dollars and were borrowing rupees due to the inverted interest rates.

Due to unprecedented levels of excess liquidity in the overnight market interest rates did not move up in a correction – which would have raised the forward premium – despite interventions by the central bank which reduced some excess liquidity.


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Excess liquidity fell from 266 billion rupees at the beginning of the year to around 120 billion rupees amid dollar losses to interventions and debt repayments.

The central bank then closed the forward market, preventing banks from giving forward cover.

“So the central bank took necessary actions about that,” Cabraal said. “And because of those actions taken by the central bank in the past few days, we once again saw the rupee being appreciated.”

Same Boat

Minister Cabraal asked exporters to convert their dollars as soon they receive them, as they may face losses by listening to fear mongers.

“We should keep in mind that it is a tough period for the world, so in such a tough period when we are going forward we all should go forward together,” he said.

“It’s like going in a boat, when that boat is going in a rough sea we should not shake the boat, If one or two tries to shake the boat everyone in the boat will have to face the consequences.”

Cabraal said if some are shaking the boat in that manner will, they will have to take necessary steps in order to stop them from shaking and making the boat unstable,

“It is what the central bank has done now,” he said. “There are other things the central bank can do but our opinion is that it is not necessary to do them now.”

Analysts have blamed a so-called ‘flexible exchange rate’ where a pegged exchange rate is suddenly turned into a floating exchange rate as money printing puts pressure triggering panic and uncertainty forcing importers settle bills immediately taking more credit and exporters to watch and wait.

There have been calls for central bank reform to stop the instability.

The rupee has appreciated in recent days from around 196 to 191 to the US dollar.

Past Depreciation

Meanwhile Cabraal said in 2014, when Mahinda Rajapaksa administration had left office, the US dollar was 131.5 rupees to the dollar.

At the time the only accusations from the economic experts in the opposition at that time were that the Central Bank is controlling the rupee as it was stable for years and the rupee should be allowed to float.

“But after they came into power the rupee depreciated for 5 years like never before with an annual average depreciation of 6.7 percent,” he said.

There were no global crisis or any other problem during those five years but the rupee depreciated to 181.63 against the US dollar.

“The rupee only depreciated by 2.6 percent in 2020, it is a big achievement when considering the tough period we are going through, meanwhile, the central bank was able to collect 282 million dollar to buttress its reserves,” Cabraal.

The rupee fell around 50 to the US dollar during the earlier period, he said.

Other analysts had also blamed the last administration for giving the central bank independence to target a real effective exchange rate on contested claims that the rupee was more ‘overvalued’ than East Asia, while printing money.

The resulting currency crisis then created consumption shocks that lowered growth.

More money was then printed on the basis that there was an output gap, triggering another currency crisis and destroying the economic credentials of the United National Party, which was the largest partner of the then ruling coalition.

Analysts had warned of the outcome earlier.


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Analysts and economists are now warning that the current monetary framework involving so-called Modern Monetary Theory, with high levels of excess liquidity would also have dangerous consequences as soon as economic activity picks up.

While tourism receipts fell, with no dollar income for tourist sector workers and hotel owners to spend, imports will fall by the same amount, unless money was printed, and credit picked up.

There have been steady losses in foreign reserves, mostly from the financial account despite weak credit lowering imports. (Colombo/Jan29/2021)

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