Financial Times

Competitiveness maintained despite rupee appreciation
Despite the nominal strengthening of the rupee taking place in foreign exchange markets, the real effective exchange rate has fallen, maintaining Sri Lanka's competitiveness, the Central Bank said last week. Dr. A.G. Karunasena, Director (Research) of the Central Bank said exporters had to worry only about the real effective exchange rate (REER).

"Our inflation has fallen faster than the appreciation of the exchange rate," he told a news conference. "The REER has depreciated so our competitiveness has increased." The nominal appreciation of the rupee against the dollar indicates market confidence and that "people are bringing in money," Karunasena said. Exporters, particularly of tea and apparel, have complained that competitiveness in their markets was being eroded by the sudden strengthening of the rupee against the dollar.

The government has said the appreciation of the rupee was driven by foreign exchange inflows resulting from better management of the economy and greater investor confidence. However, the Colombo Tea Traders Association and the Exporters Association of Sri Lanka have appealed to the government to correct this situation as they were adversely affected by the currency appreciation.

The Ceylon Chamber of Commerce said that current indications in the tea trade alone, show that the rupee appreciation would result in a loss of about Rs. 3.00 to Rs. 4.00 per kilo. "This will, in turn, have an adverse effect on the income of small holders," it said in a statement. Exporters who bought large stocks in advance reported making losses after the appreciation of the rupee while producers have seen prices coming down at the Colombo auctions. Some buyers are reported to have had to renegotiate contracts.

The Exporters Association has also pointed out the impact on the export trade particularly in comparison with Sri Lanka's direct competitor countries, some of which enjoy the benefits of an undervalued currency and export subsidies.

"Most of the exporters import raw materials for processing and pay through their offshore dollar facilities. As a result, there is no favourable impact to those exporters on the net cost of imported inputs," the Ceylon Chamber of Commerce said.
The rupee, which was steadily depreciating against the dollar for years and reached Rs. 98 against the dollar a few weeks ago, has strengthened to around Rs. 94 against the dollar today. Mr. Karunasena said that compared with 24 currencies which included those of the island's competitors, Sri Lanka's competitiveness had gone up by four percent.

The currencies of competitor countries had also appreciated with the Indian rupee going up by 4.5 percent, the Thai baht by five percent and the Indonesian rupiah by six percent. "So there's no adverse impact on ongoing export recovery. Export growth will continue," he added.

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