Managing risks amidst high inflation, interest rates

Sri Lanka has been experiencing chronic high interest rates and frequent exchange rate fluctuations and this has become a hotly debated topic in both business and academic circles.

Managing risks is topmost on the agenda of many companies. In this context the Ceylon Chamber of Commerce has invited specialists on the subject with practical knowledge to share their understanding and expertise at a seminar on May 9 titled “ Managing risks on fluctuations in interest and exchange rates.”

The panel would be chaired by Ronnie Peiris, Group Finance Director, John Keells Holdings and presentations would be made by W. A. Wijewardena, Deputy Governor, Central Bank of Sri Lanka on “Basic Economics behind Interest and Exchange Rate Fluctuation”, Amal Sanderatne, CEO, Frontier Research on “Sri Lankan Economy – A Brief Outline”, Ajith Devasurendra, Managing Director/CEO, Taprobane Group on “Managing interest rates and related risks”, Trevine Jayasekera, Finance Director, Brandix Lanka on “Effective Structuring of Capital”, and Mangala Boyagoda, Managing Director, Lanka Wealth Management (Pvt.) Ltd on “Managing Forex Flows and Reserves”.

The chamber said high inflation in Sri Lanka has pushed interest rates upward causing a sharp increase in the cost of borrowing for businesses. This increase in interest rates and the fluctuations of the same has forced companies to re-look at their capital structure and cash flow management.

Similarly, exchange rate fluctuations also cause revenues and profits of companies (mainly importers, exporters and banks) to fluctuate greatly and this makes business plannig difficult for such companies. In addition to this, the global demand is contracting due to the credit crisis and the recessionary situation in the west, impacting on the bottom line of companies. All these factors make cost management increasingly important, not only to remain competitive but also to survive in such a turbulent environment, the chamber said.

It said effective management of the capital structure using debt and equity and short/long-term debt becomes important when the cost of borrowing increases. High interest rates increase cost of capital and could lead to cash flow problems for companies that have not looked at scenarios and planned for it. Although there is much debate on the negative effects of interest and exchange rate fluctuations in Sri Lanka, little emphasis has been given to managing these unfavourable fluctuations.