Lanka Rupee Weakens Against Euro, Helps Exporters to Europe

30th October 2009, www.lankabusinessonline.com

The Sri Lanka rupee has weakened against the Euro and Sterling since November 2008 increasing the edge of exporters to Europe and helping offset a possible hit from lost trade concessions, Central Bank Governor Nivard Cabraal said.

"It is our contention that Sri Lanka's exporters' competitiveness to the European Union had increased sharply since November 2008," Cabraal told reporters Thursday.

Sri Lanka is facing the prospect of losing preferential access to the European market next year following an adverse report over non-compliance with conventions on civil and political rights of Sri Lankan citizens, weak rule of law or impunity and human rights abuses.

The Central Bank said a duty concession available to some 7,000 goods exported to the EU was around 7.0 percent. For apparel exports the value of the concession was about 78 million Euros the Central Bank said, referring to EU data.

The Central Bank said the rupee had depreciated by 18.5 percent against the Euro from November and 14.0 percent against Sterling.

The Sri Lanka rupee is pegged to the US dollar and other dollar pegged countries, such as China, in the so-called pegged zone would also get a similar benefit.

But assistant governor Nandalaal Weerasinghe said the rupee had also depreciated against the US dollar by about 7.0 percent in the period while key competitors such as Bangladesh central bank had appreciated its currency by about 5.0 percent.

Bangladesh's central bank has had a stronger record in generating low inflation than Sri Lanka's which had experienced 20 percent plus inflation in recent years.

The Indian currency has also appreciated in the period. With the US banking system becoming stronger, and Federal Reserve 'central bank impotence' petering off, the dollar is expected to gradually weaken unless rates are raised in the US.

Exporter competitiveness is determined not necessarily by the nominal exchange rate but the real exchange rate denominated by the difference in domestic inflation.

If a central bank generates a high level of inflation workers find it difficult to live and demand higher wages, pushing production cost above that of a competing country with low inflation.

A high inflation differential makes the currency of a country 'overvalued' against competition, which is measured by a real exchange rate index.

But in the past year Sri Lanka's central bank had been able to keep inflation to around one percent, preventing further overvaluation.

Cabraal said total exports have been rising steadily from April. In addition to low inflation, interest rates were also falling steeply helping exporters. A recovery in foreign markets was also helping bring in orders.

The central bank says apparel firms have orders to fill till mid 2010.