Sri Lanka Removes Currency Trading Band against Dollar. Central Bank Governor Says Intervention in Currency Market would be through supply and not based on Price

09th February 2012, www.bloomberg.com

Sri Lanka’s rupee fell the most since November and stocks plunged after the central bank said it was changing the way it manages the currency against the dollar.

Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said that effective from today a trading band against the dollar would be removed. The monetary authority would now “intervene” in the currency market through “supply and not based on price,” he said.

The Sri Lankan rupee dropped 1 percent to 115.40 per dollar as of 3.03 p.m. in Colombo, according to data compiled by Bloomberg. That was the biggest decline since the currency was devalued on Nov. 22. The benchmark Colombo All-Share Index of stocks fell 2.3 percent.

“Although foreign investors may make a currency loss, the almost floating of the rupee will give them more clarity on the exchange rate in future investment decisions,” said Bimanee Meepagala, a Colombo-based analyst at NDB Aviva Wealth Management Ltd., the nation’s biggest non-state fund.

The move comes after calls by the International Monetary Fund for a more flexible exchange rate. Sri Lanka devalued the rupee by 3 percent in November to boost exports. The central bank narrowed the currency’s trading band against the dollar on Feb. 3 and Feb. 6 and today, prior to announcing its removal. The monetary authority raised benchmark interest rates for the first time since 2007 on Feb. 3 to contain credit growth and inflation in the $50 billion economy.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editor responsible for this story: Hari Govind at hgovind@bloomberg.net

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)