Falling rupee not due to economic fundamentals

The Central Bank this week strongly rejected claims that the rapidly depreciating rupee – at least in recent weeks – had anything to do with economic fundamentals.

In a statement, the Bank said, “based on strong economic fundamentals particularly in the external sector, the Central Bank is of the view that the depreciation of rupee that has taken place during the past two weeks is unwarranted.”

It said though the Sri Lanka rupee has depreciated by 0.99 percent in the past two weeks (August 16 – 29), the external sector performance clearly indicates that such depreciation is not based on any fundamental macroeconomic factors.

Export earnings continued to increase during the first half of 2007 outperforming the high growth recorded in the same period in 2006. Exports during the first half grew by 12.9 per cent from US$ 3.1 billion in 2006 to US$ 3.6 billion in 2007. Imports grew modestly by 3.9 per cent to US$ 5.1 billion during the first half of 2007 against US$ 5 billion in the first half of 2006, resulting in the trade deficit in the first half of 2007 narrowing to US$ 1.6 billion from US$ 1.8 billion in 2006.

Worker remittances by Sri Lankan migrants increased significantly by around 18 per cent to US$ 1.3 billion in the first half of 2007 while FDI in the first half of 2007 amounted to over US$ 260 million against US$ 200 million in the corresponding period in 2006.

Financial flows to government too increased substantially during the first half of 2007 to US dollars 603 million as compared to US dollars 358 million during the same period in 2006.

As a result of all this strong external sector developments, the overall balance of payments recorded a surplus of around US$ 151 million during the first seven months of 2007. The reserves at end July 2007 are sufficient to finance about the months of imports, the Bank said.