Local Currency for India-Sri Lanka Trade Mooted

01st October 2010, www.lankabusinessonline.com

Using local currencies to trade between India and Sri Lanka could reduce transaction costs and speed up cargo movements, an expert has suggested.

Somi Hazari, former president of the India-ASEAN-Sri Lanka Chamber of Commerce & Industry, said delays in clearing cargo could have serious repercussions for traders.

Indo-Lanka trade continues to be in US dollars which is one of the reasons for high transaction cost, he told a seminar on trade facilitation issues related to the India – Sri Lanka free trade deal.

It was organized by Institute of Policy Studies of Sri Lanka and UNDP Asia-Pacific Regional Centre, Bangkok.

Hazari said exporters and importers have to channel their transactions in US dollars through correspondent banks in New York.

This adds to the cost of trade for companies in both India and Sri Lanka..

He suggested the two central banks of both countries work together on a basket of currencies made up of Sri Lankan and Indian rupees.

"This could lead to win-win situation for both sides and bring down transaction cost and the time taken."

Under British rule the Indian rupee, then specie based - was widely used in the Middle East and even Africa. Sri Lanka's own rupee was pegged to the Indian rupee through a currency board.

Even after the creation of the Reserve Bank of India as a private corporation the rupee held its value.

But after independence the rupee lost its value as the monetary system was mis-used to finance deficit budgets after it became a state-run entity. Middle Eastern countries swiftly dumped the Indian rupee and formed their own national currencies.

The Indian rupee started gaining strength after 1991 when a balance of payment crisis changed the country's monetary policy.

The finance ministry secretary stopped participating in the monetary policy meetings and obligatory deficit financing through printing money ended.

"RBI had become like a cookie jar, where the government, as and when they wanted, could just dip into the cookie jar and take what they wanted," Narendra Jadhav, then principal advisor and chief cconomist of the Reserve Bank of India, told a seminar in Colombo in 2006.

"But in 1993, there was a contract signed between RBI and the Ministry of Finance, which paved the way for the elimination of this automatic monetization.

"Over a 4 year period we eliminated the automatic monetization of the deficit."

Related Info :

• Indo-Sri Lanka FTA (ISFTA) - Detailed Information - The Board of Investment of Sri Lanka (BOI)