Strong rupee weakens hearts

The Central Bank has applied the breaks to a further appreciation of the rupee against the dollar but dealers are concerned the currency is under pressure to appreciate in the medium term, which could make life difficult for exporters.

Dealers said the rupee was under pressure to appreciate further last morning with exporters converting their dollar holdings.

The dollar traded at Rs. 112.74/78 during the day after opening the day’s trading at Rs. 112.77/79, dealers said.

"Some exporters were converting their dollars and this created some pressure for the rupee to strengthen further against the dollar, which would have happened if not for intervention by state-owned banks," a dealer told The Island Financial Review.

Last week, the rupee reached its strongest position against the dollar in a year. "The week began with the dollar trading at 113.05 but it fell against the rupee, trading at Rs. 112.75/84, the strongest since the war ended. State-owned banks intervened to prevent a further appreciation of around 30 cents," a dealer said.

State-owned banks intervene in the market to carry out the policy objectives of not preventing the rupee from gaining too much against the greenback.

"If the rupee appreciates too fast exporters would suffer because their real incomes would fall. And given the production costs in the country our export sector could be severely undermined by a strong rupee," another dealer said.

"Most of our competitors in the region are depreciating their currencies and this makes it difficult for exports to maintain their competitiveness. Moving forward, we are concerned about the appreciation of the rupee and the impact it would have on export sector," another dealer said.

Dealers said the Central Bank was attempting to maintain a stable exchange rate, but an increase in foreign inflows would make its task difficult.

"What we are seeing right now is foreign investments into government securities and the stock exchange. We are seeing very little in terms of long term foreign direct investments at the moment, but once they pick up, and remittances and export earnings improve, the rupee would be under real pressure to appreciate," a dealer said.

The plus side of a stronger rupee is that it would be less expensive for the government to finance its servicing of foreign borrowings. Also, imports would be cheaper, which means inflation would not be under pressure from rising import bills.

"The rupee is not appreciating, or under pressure to do so, because our productivity as a nation is improving. The rupee is appreciating, for the most part, because of short term foreign investments that can easily be taken out. This should be a matter of concern," a dealer said.

An economist argued that the rupee was allowed to appreciate at the expense of the export sector so that the government could pay its debts. "This makes sense, but for how long can this continue. We should remember that the export sector is necessary if the country is to increase its wealth," an economist said.

However, officials argue the rupee’s strength was determined by the market. "We are intervening to prevent the rupee from appreciating further as this would hurt exporters," an official said.

Sri Lanka’s trade deficit expanded by 122.2 percent during the first four months of this year with imports picking up faster than growth in export earnings, with apparels declining 11.6 percent, latest data from the Central Bank showed.

Export earning grew 10.7 percent to US$ 2,307 million for the period from January to April 2010 but the largest export earner, apparels, saw a 11.6 percent drop in earnings to US$ 930.7 million from US$ 1,053.2 million last year.

Import expenditure grew much faster at 42.9 percent during this period to US$ 4, 191.9 million from US$ 2,933.1 a year ago. The petroleum bill grew by 112.9 percent to US$ 1,034.7 million from only US$ 434.7 million last year.

The trade deficit grew by 122.2 percent to US$ 1,884.9 million from US$ 848.1 million.

Worker remittances, which grew 14.5 percent to US$ 1,198.8 million from US$ 1,046.9 million last year, was not enough to cover the trade deficit as it did for most of 2009.

Exporters were disappointed the mini-budget for 2010 failed to provide any relief to their struggling businesses, but several top officials said the budget gave an indication as to what the government planned to do.

Ministry of Finance and Planning Director General for Fiscal Policy S. R. Attygalle, told a post- budget seminar at the Ceylon Chamber of Commerce that imported raw materials would be given tax concessions while imported goods that can be produced locally would be heavily taxed.

Treasury Secretary Dr. P. B. Jayasundera said the government was planning to discourage exports in their primary forms. He said creating value added exports was the only way for Sri Lanka to establish 10 industries earning more than US$ 1 billion a year.