Call to formulate common SAARC currency

Ramani KANGARAARACHCHI

Introducing a common SAARC currency could make the country's currency hard, Capital Trust Securities Director Sarath Rajapakse said.

He was speaking on "Currency Fragility- Impact on Developing Countries " at the CIMA -LBR-LBO Colombo Forum held recently.

"The convenience of convertibility, ability to borrow and settle debts with own currency and possibility of having currency unions by introducing a common SAARC currency also could make the country's currency hard. A common currency area at least for Sri Lanka India and Maldives will be an advantage," he said.

"The country can make its currency hard by establishing a freely traded currency with a market determined exchange rate, he said.

However, the country should be able to hedge against exchange rate fluctuations , use currency spots and use the foreign investment window opened for buying hedging instruments until such time. It also should lobby for SAARC currency union and campaign for convertibility.

Rajapakse said making the country's currency stable is very important and genuine and sound reserve backing is one of the main factors in maintaining this.

Gold standard to US dollar reserves, hard currency basket backing and purchasing power parity and freely traded currencies are some of other factors.

Elaborating on possible causes of exchange rate instability and financial fragility he said the inability to borrow or settle what is owed with own currency is one of the main reasons.

Dangers of a pegged exchange rate where government and banks become reckless is another reason.

Borrowers in general lack incentives to repay and creditors charge higher interest rates therefore there is a commitment problem as well which means a flaw in the institutional framework

Pointing out some implications of currency instability he elaborated seven points . Namely run away inflation, difficulties encountered by exporters ,fluctuating raw material prices for importers, thriving black market for foreign exchange, uncontrollable large scale exodus of money , reluctance of foreigners to invest and wild fluctuations in interest rates and exchange rates.