Pressure on rupee to ease on inflows: CB

• More inflows into service, capital, financial accounts, says CB
• Rupee was under pressure due to heavy imports in Aug., Sept.
• Currency dealers wary on rupee stability

By Shihar Aneez

Reuters: Pressure on Sri Lanka’s rupee currency will recede in coming months due to increasing inflows into the country’s service, capital and financial accounts, the Central Bank said on Monday.

Despite recent global market turmoil, the Central Bank has kept the currency largely steady through repeated interventions in the foreign exchange market, shrugging off a request by the International Monetary Fund last month to limit such moves after a steady decline in non-borrowed foreign reserves.

The Central Bank has said its intervention has taken into account expected future dollar inflows and will go forward in spite of persistent IMF pressure.

“There won’t be any significant pressure on the rupee because inflows are happening,” the Central Bank’s Chief Economist K.D. Ranasinghe told Reuters in a telephone interview.

“There was a little pressure on the foreign exchange market in August and September, mainly due to high import demand of intermediate and investment goods and that would recede in the next couple of months with further increase in the inflows.”

The IMF last month said the Central Bank’s dollar sales to prop up the rupee were not in line with the current fundamentals of the economy.

The rupee has risen 0.7 per cent so far in 2011 but has been kept in a rough 110-11 range to the dollar over the past month.

Despite a ballooning trade deficit of $ 5.1 billion, the balance of payment has recorded a $ 1 billion surplus by end-July mainly due to increased inflows into service, capital and financial accounts in addition to high influx in worker remittances and foreign direct investments.

Sri Lanka has historically posted balance of payment surpluses through borrowing and grants.

Remittances rose 25.6 per cent to $ 2.9 billion in the first seven months of 2011, while inflows to Government accounts jumped 72.4 per cent to $ 2.7 billion in the same period, thanks to $ 1 billion from a 10-year sovereign bond sale in July.

“We think that there will be more inflows.

Inflows to the service sector are better than what we expected from tourism, port and aviation,” Ranasinghe said. “We expect further inflows into the capital and finance account also.”

The Central Bank’s steps in relaxing foreign exchange controls helped 14 Sri Lankan companies borrow $ 197 million by mid-September from foreign sources, while 20 foreign companies have opened up business in Sri Lanka this year.

FDI in the first half of the year has been almost doubled to $ 413 million.

Currency dealers expect more pressure on the rupee in the long term despite the Central Bank’s hopes of more inflows.

Emerging market currencies and other riskier assets have retreated sharply in the past few months as worries about Europe’s debt crisis and the faltering global economy prompt investors to move into perceived safe-havens such as the US dollar.

“So-called inflows are either borrowed funds or hot capital. Nothing is coming here for wealth generation at the moment,” said a currency dealer at a Colombo-based private bank, who asked not to be identified due to the sensitivity of the matter.

“If you borrow today, it means you will have to pay more tomorrow and if we don’t create wealth to earn more dollars, then we are going to face a problem soon.”

In 2008, the Central Bank sold dollars to prop up the rupee, but eventually had to allow the currency to depreciate after the country’s reserves fell sharply, resulting in a $ 1.4 billion BOP deficit, before it agreed to a $ 2.6 billion IMF loan to increase its depleted reserves.