Rupee to Gently Appreciation, Reserves to Top $10bn - CB Governor Cabraal

04th January 2011, www.island.lk

Central Bank Governor Ajith Nivard Cabraal said the rupee would gently appreciate this year. With foreign currency inflows expected to pick up this year, he said the rupee would tend to appreciate but the rupee/dollar exchange rate would be kept stable with the Central Bank absorbing large inflows to prevent a sudden appreciation. In 2010, the rupee gained 3.1 percent against the greenback.

"We would allow the trend to continue (the appreciation of the rupee against the dollar) but we would ensure there is exchange rate stability because this is important," Cabraal said presenting the ‘Road Map: Monetary and Financial Sector Policies for 2011 and Beyond’ at the Central Bank auditorium yesterday (4).

"There will be a gentle appreciation of the rupee this year (2011)," he said. Cabraal said the Treasury room of the Central Bank was gearing to the eventuality of official foreign currency reserves reaching US$ 10 billion, which he said would be soon. At present reserves are near US$ 6.6 billion, enough to finance exports for 6.1 months.

According to Central Bank estimates, export earnings grew 13.3 percent in 2010, earnings from tourism increased 61.4 percent to US$ 501 million, worker remittances increased 24 percent to US$ 4.1 billion and are expected to continue to grow in 2011.

Dealers told The Island Financial Review that the rupee could appreciate to Rs. 109.50 against the dollar after appreciating near 3 percent beginning the year at 114.35 and closing 2010 at 110.94/65.

The Balance of Payments surplus is estimated at US$ 900 million in 2010 and US$ 350 million in 2011.

Although FDIs have performed below expectation, at US$ 500 million in 2010, Cabraal said conscious efforts to improve the country’s sovereign ratings and business climate would attract more investments, along with exchange control relaxations.

Improving investor confidence was vital and Cabraal said the downward sloping yield curve of Sri Lanka Sovereign Bonds was testament to having moved in the right direction.

A US$ 500 million bond issue in 2007 had a yield of 8.25 percent. In 2009 an issue for the same amount yielded 7.4 percent. The latest sovereign bond issue of US$ 1 billion last year attracted investors with a yield of 6.25 percent. This ten year bond was 6 times oversubscribed.

"Strong macroeconomic fundamentals, the end of a 30 year conflict and the ongoing successful performance under the IMF standby facility arrangement contributed to improved investor sentiment," Cabraal said.

Image: The Central Bank’s Road Map on Monetary and Financial Sector Policies for 2011 was unveiled at the John Exter Auditorium yesterday. Central Bank Governor Ajith Nivard Cabraal addressing top public officials and private sector executives. Picture by Sumanachandra Ariyawansa. (Courtesy www.dailynews.lk).

Sri Lanka Rupee Trading in a Band after a State Bank that Acts for Monetary Authority Quoted a Two Way Price

27th November 2009, www.lankabusinessonline.com

The Sri Lanka rupee started trading in a band Friday after a state bank that usually acts for the monetary authority quoted a wide two way price, dealers said.

A state bank that was largely quoting a buying price amid dollar inflows into money markets in recent months offered a wide two way price of 114.35/60 against the US dollar in the style of a 'trading band' for the Sri Lankan currency.

Market quotes for rupee was around 114.50/55 in mid-morning trade.

Sri Lanka has a 'soft-peg' against the US dollar in the sense that the monetary authority has powers to fill liquidity losses coming from dollar sales made to defend a peg, a process which makes the peg inherently unstable.

But a flexible peg, which moves can help keep a country stable by allowing the exchange rate to weaken when there is pressure for foreign exchange outflows, which also prevents the need to make liquidity injections.

Until 1950 Sri Lanka had a 'hard' peg which does not break as liquidity injections (money printing) does not take place and any dollar sales causes a contraction in local money supply, which however can lead to higher interest rates.

Under a 'hard peg' the monetary authority has no policy rate and only the exchange rate is targeted.

The inherent instability of 'soft pegs' comes from a monetary authority that tries to target interest rates and the exchange rate at the same time.

Many high inflation countries which are prone to macro-economic instability and balance of payments crisis, have experimented with soft pegs of various kinds, including trading bands and crawling pegs, and peg that are hit by sudden 'step devaluations'.

Most stable pegs (especially in East Asia) have come from maintaining consistently higher policy interest rates than the anchor currency (usually the US dollar) which results in large foreign reserve accumulations.

Sri Lanka Rupee off Exact Peg, To Follow a More Flexible Exchange Rate

23rd November 2009, www.lankabusinessonline.com

Sri Lanka rupee closed weaker against the US dollar at 114.40/50 Monday after opening stronger under a more flexible exchange rate adopted by the Central Bank, dealers said.

The spot dollar opened at 114.25/30 rupee levels against the greenback Monday and peaked to around 114.50/60 level in intra-day trading, dealers said.

Central Bank governor Nivard Cabraal has said that the rupee may not follow an 'exact peg' like in the past, where the monetary authority held the currency at 114.80 levels for most of the year.

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.