CB says Sri Lanka needs to maintain competitive exchange rate to boost exports, FDI

The Central Bank yesterday said maintaining a competitive exchange rate that would promote Sri Lankan exports in the international market and attract foreign direct investment (FDI) is vital for Sri Lanka’s economy to grow.

“Maintaining a competitive exchange rate aimed at promoting Sri Lankan exports in the international market and attracting foreign direct investment to Sri Lanka will remain vital in promoting the country as a globally competitive export-led economy,” the Central Bank said in a statement.

Explaining the positive and negative effects of the depreciation of the exchange rate, which is a hotly debated issue currently, the Bank said the most prudent policy stance would be to allow the exchange rate to be determined flexibly, according to supply and demand conditions for foreign exchange in the market.

Allowing the exchange rate to be determined according to market forces would not necessarily lead to a continuous depreciation of the rupee, the Bank said.

However, as the Central Bank has intervened in the domestic foreign exchange market to prevent a sharp volatility of the Sri Lankan rupee, any decision to move away from this policy would lead to a sharp depreciation immediately before stabilizing thereafter, it pointed out.

The Bank explained that the depreciation of the exchange rate has a positive impact on the country’s trade deficit as it makes imports more expensive for domestic consumers and exports cheaper for foreigners.

Such a policy would encourage domestic consumers to consume domestically produced alternative goods and improve export competitiveness of the country, the Bank said.

The Central Bank dismissed the comments that the external debt burden of the government has increased significantly due to the depreciation of the rupee as “misinterpretation of facts” since the foreign currency equivalent of loans and the interest to be repaid would not change even though the value of the rupee in terms of the foreign currency changes.

The full statement is available online at http://www.cbsl.gov.lk/pics_n_docs/latest_news/information_series_note_20161223e.pdf