Rupee appreciation? No reason for exporters to fuss
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.
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
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.
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.
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.
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 $) as their export proceeds were higher in rupee terms.
appreciation of the Rupee in terms of the US$ 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.
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.
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.
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