Rupee flexibility to boost exports

COLOMBO: The Central Bank said yesterday it would allow the rupee a greater exchange rate “flexibility” to spur exports as the global financial crisis forces down the currencies of trade rivals.

“The Central Bank of Sri Lanka has decided to allow the rupee exchange rate against the dollar to respond with greater flexibility when compared to the very stable level that was maintained,” the Bank said in a statement.

“This move is particularly necessitated by the fact the currencies of some of Sri Lanka’s major trading partners have since mid-September depreciated sharply against the US dollar, leading to some pressure on the competitiveness of Sri Lanka’s exports,” the statement said. Before the announcement, the Sri Lankan currency, which has been informally pegged to the US currency, was at 108 rupees to the dollar.No trades in the currency were reported after the decision but most analysts said they were eyeing a level of around 112 rupees to the dollar. “We’ve decided to allow the rupee to depreciate against major international currencies,” the Bank’s economic research director Nissanka Weerasinghe told AFP, citing the need to protect the island’s exports.

“For instance, the Indian rupee - our major trading partner -has fallen about 12 percent against the US dollar over a one-year period ending August,” he said.

Weerasinghe declined to say what rupee level the bank considered suitable. Analysts had been urging the Central Bank to let the rupee find its own value to help exports.

The global financial crisis has prompted foreign buyers of Sri Lankan rupee-denominated government bonds to repatriate their investments, putting pressure on the local currency.

In mid-2008, foreign bond holders held about 600 million dollars worth of Sri Lanka government rupee-denominated securities.