Sri Lanka lets more ‘flexibility’ in rupee-dollar exchange rate

October 31st, 2008 - 12:11 am ICT by IANS  

Colombo, Oct 30 (IANS) Sri Lanka’s Central Bank Thursday decided to allow the rupee exchange rate against the US dollar “to respond with greater flexibility” keeping in mind the recent sharp decline in export prices and prospects of lower export demand due to further slowing down in the global economy.The Central Bank in a statement said Thursday that the move was “particularly necessitated” as the currencies of some of the island’s major trading partners and competitors have since mid-September 2008 depreciated sharply against the US dollar “leading to some pressure on the competiveness of Sri Lanka’s exports”.

“Therefore, as a measure of reducing pressure on the real sectors, the Central Bank would favour a limited depreciation of the Sri Lanka Rupee so as to enable the real sector to maintain Sri Lanka’s export competitiveness across all export and import competing industries,” the bank said.

“As a result, the export sector could continue to perform well in the future while of course taking the necessary measures to improve their productivity and cost effectiveness in order to further enhance their competitiveness in global markets”.

Claiming that the island’s export sector had been growing well above 12 percent during the first eight months of the year, and has shown commendable resilience in the light of the current unfavourable global conditions, the bank said that it was “now considered desirable that an added support be granted in order to provide the impetus for the exports to remain competitive in the months ahead”.

“The envisaged limited depreciation is also ‘timely’ since it will not adversely affect the declining trend in Sri Lanka’s inflation as global prices of petroleum, gas, wheat, sugar, milk powder, etc are declining and this trend is expected to continue during the next few months as well,” it said, expressing hopes that the move would help to contain inflation in the medium term.

Acknowledging that the vital importance of maintaining stability of the financial markets, in both the foreign exchange and rupee markets, even in the face of the current global financial crisis, the bank said it stood “ready to provide liquidity to maintain stability of the exchange rate if the rate tends to be more volatile than warranted”.

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