The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Rupee appreciation? No reason for exporters to fuss about
The slight appreciation of the Rupee in relation to the Dollar in recent weeks has caused some excitement. The government is claiming it as an achievement.
Exporters are finding it a problem and wanting remedial action. The impression created in all this is that the Sri Lankan Rupee has become a strong currency and that the external finances of the country are in a robust position.

The facts are somewhat different. The appreciation of the Rupee was only in terms of the US Dollar. The Rupee, far from appreciating, has in fact depreciated against most currencies. The appreciation of the Rupee is largely a reflection of the depreciation of the US Dollar with respect to other major trading currencies.

The current exchange rate of the Rupee to the US Dollar is about Rs 94.50. It is lower than what it was one year ago when it was slightly more than Rs. 96. The Rupee has appreciated in terms of the US Dollar by about Rs. 1.50 (around 1.75 per cent), during the past twelve-month period.

Yet in terms of several other important currencies such as the UK Pound Sterling, the Euro, Japanese Yen and the SDR, it continued to depreciate. In terms of the Euro the Rupee depreciated by 13 per cent. It depreciated by 2.5 per cent with respect to the Pound Sterling and by 3.8 per cent in relation to the Japanese Yen during the past twelve months. The SDR was 4.3 per cent more expensive to the Rupee.

It is however a fact that there has been a decelerating trend in the depreciation of the Rupee in terms of the US Dollar since last year. In 2002 the depreciation was only 3.7 per cent in comparison with a depreciation of the Rupee against the US$ by 11 per cent in 2001 and a depreciation of about 13 per cent in 2000.

Although there has been a significant difference in the behaviour of the Rupee in relation to the US$, the depreciation of the Rupee in terms of other major currencies was much higher. In 2002, the Rupee depreciated by 18.8 per cent in relation to the Euro; 13.1 per cent in terms of the Japanese Yen; 12.9 per cent in terms of the Pound Sterling and 10.7 per cent in terms of the SDR.

The Nominal Effective Exchange Rate depreciation in terms of these five currencies was 9.4 per cent. Exporters have been benefiting from the continuous depreciation of the Rupee for a long time. The depreciation of the Rupee meant that even when the export price in foreign currency was the same, the depreciation of the Rupee resulted in exporters receiving higher rupee prices.

Alternately, exporters were able to offer more competitive prices as the rupee value of their exports was rising. They could sell at a lower export price (in $) as their export proceeds were higher in rupee terms.

The current appreciation of the Rupee in terms of the US$ means that those exporters who designate their exports in terms of dollars would not be reaping such gains. Since most of our industrial exports go to the US, exporters to the US will no longer gain from the depreciation of the Rupee in terms of the Dollar.

In fact owing to the recent depreciation their export proceeds, if designated in US$, would fetch less Rupees than before. This is not so with respect to exporters in other currencies as the Rupee continues to depreciate in terms of other currencies.
The appreciation of the Rupee or a lower rate of depreciation has benefits to exporters as well. The lower Rupee depreciation means that import prices of their inputs would be less.

Since industrial exports have a large import content, this benefit is not insignificant. They must also be mindful of the fact that they have been benefiting from a secular depreciation of the Rupee. The US Dollar was only Rs. 40 in 1990 and Rs. 75.78 in 2000, compared to today's Rs 94.50. Exporters should not rely on the depreciation of the currency for their competitiveness and profits. Improved efficiency and enhanced productivity are the keys to long term international competitiveness.

Exporters have also had other advantages recently. The rate of inflation and interest rates have declined. It is in a context of lower import prices, lower rates of interest and lower inflation that exporters must view the issue of the Rupee appreciation in terms of the Dollar. The fact that the Rupee has continued to depreciate in terms of other currencies must also be recognised.

Additionally, exporters are benefiting from lower tariffs in Europe and several free trade agreements. Given all these facts, exporters should not exert pressure to depreciate the Rupee. Spare a thought to the domestic consumer too.

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