Sri Lanka Allows Rupee Drop to Boost Exports, Central Bank Says

Sri Lanka Allows Rupee Drop to Boost Exports, Central Bank Says

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By Anil Varma

Dec. 11 (Bloomberg) -- Sri Lanka is allowing the rupee to decline at a faster pace, responding to exporters’ demand for a weaker currency to help weather the global economic slump, the central bank said.

The Central Bank of Sri Lanka this week scaled back intervention aimed at stemming the rupee’s decline, Nandalal Weerasinghe, the chief economist based in Colombo, said in an interview. Foreign-exchange reserves are being exhausted and now may be enough to pay for less than three months of imports, according to Asian Development Bank estimates. Exports fell by the most in two years in September, partly as the island’s currency gained against that of India.

“There’s a huge demand from exporters to allow depreciation because our exports of tea, rubber and coconuts have been affected” by the global slowdown, Weerasinghe said yesterday. “We also took into consideration the fact that our currency appreciated against our competitors.”

Sri Lanka’s rupee has weakened 1 percent since Dec. 5 to 111.25 per dollar, heading for the second-biggest weekly loss this year, according to data compiled by Bloomberg. The central bank kept its currency stable in the first 10 months of this year before a devaluation of 1.8 percent on Oct. 30.

The local currency climbed 21.2 percent this year against the Indian rupee and 6.4 percent against the ringgit.

Sri Lanka competes with India in overseas sales of tea, the island-nation’s second-biggest export earner after apparels. Overseas sales, which account for a quarter of the economy, fell 9.4 percent in September.

Weerasinghe didn’t say how long the central bank will allow the currency to slide.

Slowing exports and inflation that has exceeded 20 percent have forced Sri Lankan companies, including tea producers, to cut production. The central bank expects the $32 billion economy will expand at the slowest pace in four years in 2008.

‘Managed Floating’

Sri Lanka’s central bank will continue to intervene to limit volatility in the local currency, Weerasinghe said. Monetary authorities intervene in currency markets by arranging sales or purchases of foreign exchange.

“We’ve been having this managed floating system since 2001” in the currency market, he said. “Although we have maintained a floating currency, the central bank always intervenes if there’s excess volatility. If there’s large fluctuation or volatility, we will still intervene.”

The bank has already spent a “large part” of its foreign currency reserves to keep the currency stable in the past two months as the global credit crisis stoked financial market volatility worldwide, Weerasinghe said.

The country’s foreign currency reserves were at $3.19 billion at the end of September, according to government data. Pakistan’s foreign reserves dropped to less than $5 billion before it sought a bailout package from the International Monetary Fund in October.

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.

Last Updated: December 11, 2008 01:48 EST

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