COLOMBO, June 12 (Reuters) – Sri Lanka should let market forces determine its rupee exchange rate, central bank chief Arjuna Mahendran said, and warned that trying to buck the global trend of a rising dollar is "suicidal".
In an interview with state-run ITN television aired late on Thursday, Mahendran said the tiny South Asian nation’s economy needs to keep its currency competitive.
The rupee has fallen 2 percent so far this year and the central bank has allowed it to decline gradually amid low interest rates and a broadly stronger dollar.
"Sri Lanka cannot buck that trend and go on a different direction. That will be suicidal. We have to see that our currency remain competitive," Mahendran said.
The central bank has managed to hold the rupee at a reasonable 2 percent fall so far this year compared to bigger falls in currencies like the yen and the euro, he said.
Sri Lanka’s rupee hit a record low of 134.00 per dollar on Friday after a state bank, through which the central bank usually directs the market, allowed 20 cent fall.
EXHAUSTED BORROWING LIMIT
In another note of caution, Mahendran said the $75 billion economy "has borrowed too much in the international markets" over the past decade.
Since the debut sovereign bond in 2007, Sri Lanka has borrowed over $6 billion via euro bonds while it’s total foreign debt had almost tripled to 3.1 trillion rupees ($23.23 billion) between October 2006 to December 2014.
"We are in a situation where we can’t borrow anymore. We are like a person who has got a credit card who has now taken the full limit of the credit card and can’t repay the debts," Mahendran said.
Tax revenue isn’t enough to service the debts, he said. "We have to change that situation fast."
Mahendran said the country should improve its exports and remittances to reduce reliance on borrowings, and maintain a competitive rupee.
The central bank maintained a rigid exchange rate policy since 2009 and defended it by heavily selling dollars from its currency reserves. That policy led to a balance of payment crisis in 2011 before the central bank did a U-turn and let the rupee depreciate from early in 2012.