Financial Times

CB intervention at Rs 99 to stabilise currency
Tea and garment exporters have expressed concern over the sudden appreciation of the rupee against the dollar and have warned that their competitiveness could be affected if there is no stability in the local currency.

Central Bank governor Sunil Mendis met exporters last week and assured them that the bank would intervene to prevent the rupee from appreciating to levels that would make exports uncompetitive. The Central Bank will intervene if the dollar goes below Rs 99. Exporters have said that given rising local wages and other costs, an unfavourable exchange rate could hurt exports.

"We're worried about the volatility of the rupee, not whether it is appreciating or depreciating. We don't want the market to be volatile," said Tuly Cooray, secretary general of the Joint Apparel Association Forum. He said the Central Bank had assured exporters that their competitiveness would be considered in handling the exchange rate policy.

"We do believe that the governor, who himself has been an exporter, will be able to manage it in that fashion." Mendis as former chairman of the Hayleys conglomerate had repeatedly called for a competitive exchange rate that would help Sri Lankan exporters.

The rupee has appreciated sharply against the dollar and pound because of huge inflows of foreign aid for relief work after the tsunami disaster of December 26.

Cooray said the deprecation of the rupee had always helped exporters and that its appreciation "goes the other way." He said the industry was concerned about the sudden change in the rupee's value and would not have worried so much about a gradual appreciation.

The sudden rise in the value of the rupee badly affected the first two Colombo tea auctions of the year with Ceylon tea prices falling sharply, although the market recovered last week. Many teas at the previous auctions were not sold as buyers held off owing to uncertainty about the rupee's value.

Rohan Fernando, chairman of the Planters' Association, which represents regional plantations companies, said they hope the rupee would stabilise around Rs 100 to the dollar. "In the last two weeks sales were really down but on Tuesday prices improved," Ferando said. "We met the Central Bank governor and he assured us he will do everything possible not to erode our competitiveness in tea - that's a good thing."

Lower tea prices would hurt plantation companies at a time when they are struggling to cope with rising wage, fuel and other costs, Fernando said. The fall in tea prices would also result in lower auction averages which means lower earnings for suppliers of green leaf to factories in the south producing low grown teas which now make up 60 percent of national output.

Export Development Board chairman Rohantha Atukorale said stability in the currency was important for exporters. He said that the authorities considered the real value of the dollar as being around Rs 99 and that its rise to Rs 106 last year was considered the 'perception value' based on speculation.

“The issue must be looked at from the national point of view and its net effect, keeping in mind the competitiveness of exporters as well as the reduction in import costs that results from an appreciating rupee,” he said. The currencies of India and Kenya, key competitors in the tea market, had also appreciated against the dollar.

Analysts said the tsunami relief pledges, debt moratorium by donors and the rescheduled petroleum bills have all resulted in an artificial increase in the rupee against the greenback. Gamini Karunaratne, Senior Deputy General Manager, Treasuries, Hatton National Bank, said exporters, despite losing on the rupee's appreciation, will get compensated through low interest rates.

"They will be borrowing cheaper and what they lose on the exchange rate, they can gain on the interest rates." He observed that vehicle imports have dropped after the government imposed restrictions. "This and the petroleum bills put back for next year has lowered the dollar's value considerably and the rupee is performing well," Karunaratne said.

Some analysts said the currency appreciation is not sustainable and the rupee may even go back to 105 against the dollar by mid-year, because the appreciation is artificial and perception based. "It will return to its equilibrium levels within the next three months," Murtaza Jafferjee, Managing Director, J B Stockbrokers said.

Gihan Rajapakse, General Manager, Eagle NDB Fund Management Company Ltd., said a country's competitiveness should not be affected due to an externality such as pledged money. The export sector should not be made to pay a price as Sri Lanka is an export-led country. Niyaz Aboobucker, Senior Manager Trading, Asia Securities predicted an eight percent drop in export revenues.

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