Don’t ‘sob’ anymore over rates

The Central Bank, annoyed over the ‘perennial’ demand by exporters’ for favourable exchange rates to benefit the trade, has told exporters they should make money on their own instead of relying on exchange rate policy issues.

“Exporters are complaining about the exchange rate but we have told them that the profits they make must now come on their own. If they think the currency should depreciate for them to make a profit, that’s not on (anymore),” Central Bank Governor Nivard Cabraal told The Sunday Times FT.

Exporters have been expressing concern in recent months over the appreciation of the rupee which is hurting exports and urged the authorities to provide a stable currency rate, although this is an issue that exporters have been complaining about over the years whenever the domestic currency gains against the US dollar.

But this time, the Central Bank is firm and saying ‘enough is enough.’ “They (exporters) must realize that in many countries the currency is stabilizing. We have to ensure that the currency remains stable; it’s only then that the macro economic stability works. Our message is that the currency is stable and they should work with a stable currency,” he said.

The ‘gentle’ warning came as the private sector also complained about rising interest rates which is hurting loan recoveries, consumer credit and investment.

“The high interest rates are bringing in a lot of constraints on the banks. The volatility and the uncertainty in the market compel us to lend at a higher rate. This in turns affects the entrepreneurs and the businessmen at large,” a Seylan Bank official said.

But Treasury officials said interest rates are on a declining path. “The government has a ‘mix’ in their borrowing patterns now, because they are not going to borrow entirely from the domestic market,” a Treasury official noted. He explained that the government is planning to raise money from other sources as well. “The government will borrow money from the overseas market. This will prompt the interest rates to decline, because then there will be no pressure on the domestic market,” he said. He predicted that during the next three months, interest rates will decrease.

Cabraal, referring to the exchange rate, said the rupee is strong currently due to the flow of remittances from Sri Lankans and other sources. “Even if we had a deficit trade position this is comfortably matched by the inflows that come in,” he added.

Sound tea prices overseas in which exporters are getting $3 per kg compared to $2 earlier is an added bonus to inflows. Central Bank Deputy Governor Dr Ranee Jayamaha, also commenting on exchange rate and exporter demands, said there is a wrong perception on exchange rates. “Look at countries with huge exports which have stable currencies. Does the currency fluctuate? No, they cut costs and manage,” she said pointing to the Indian situation where the Indian currency has been firmly gaining in recent months.

An industry analyst pointed out that raising money from the overseas market will not address the entire issue of interest rate hikes.

“Given that the rupee has been strengthening during the last four to five months, it is safe to assure the interest rates may decrease, mainly because of the government’s decision at the budget to borrow internationally,” an industry analyst noted.

He pointed out that if the government can raise cheap funds from overseas than locally it is a good trend, but all depends on how or for what the money is used for. “For an example, last October, the bond issue was spent mostly on repaying old loans. Also it is important to note that the government cannot keep borrowing from abroad. Borrowing in the international market will by no means address the increase in interest rates and its repercussions, despite a short term respite,” he explained.

Cabraal tosses out the argument about high interest rate complaints from banks saying, “they complain on one side but look at their bottomline – they make a billion rupees in profit.”

“We do understand that interest rates are high but at a time when inflation is high and if you keep it too low the credit expansion can be greater,” he said.

Central Bank Economic Research Director Dr Nandalal Weerasinghe says the CB allowed market rates to rise to tackle the problem of excessive credit. “We have seen the results and private sector credit is now decelerating. Credit for intermediate goods like raw materials, etc hasn’t however reduced. What has come down is consumer credit,” he said, adding that he expects interest rates to come down by around July in line with inflation which is also expected to ease by that time.