Finance Minister Ravi Karunanayake recently said the rupee could appreciate to Rs.110 against the US dollar if Sri Lanka attracts another US $ 1 billion in foreign inflows. Karunanayake identified the external shocks as the biggest threat to Sri Lanka’s economy and stressed the rupee was hit hard by the currency devaluations carried out by China and India.

“With these two big mighty giants on either side, Sri Lanka gets caught in the middle like a leaf in a cyclone. But these are temporary. Tomorrow you see US $ 1 billion coming in and suddenly find the rupee going up to 110. Then what happens? That is what we’re working towards,” he said. Last June, when the rupee was 134 against the dollar, Karunanayake had said that the rupee would strengthen up to 129/130 in two weeks due to increased inflows.

The rupee however depreciated 9 percent against the dollar last year. Meanwhile, Karunanayake was thankful to those who had already remitted money to Sri Lanka. “We’re looking at money coming into the country. We have a lot of foreign exchange coming in, I must say, and I thank all of them for having the confidence in us,” he added. Karunanayake brought in a ‘no questions asked policy’ to attract funds to strengthen the rupee and foreign reserves last October, which has raised concerns about various parties using the opportunity for unscrupulous objectives.

In January, Karunanayake had said that the policy has seen fruition, with a Belgian investor agreeing to deposit US $ 1 billion in a local bank account to bolster the rupee. He had said that half of it would be deposited immediately and the rest later this year. Sri Lanka’s foreign reserves, which stood at US $ 7.2 billion as at end-December supported by government borrowings, declined to US $ 6.3 million as at end- January, the Central Bank said. The government has to repay around US $ 4 billion in external debt over the course of the year.

Rupee forwardsend firmer onbank dollar sales;downgrade weighs

REUTERS: Sri Lankan rupee forwards ended slightly firmer yesterday on dollar selling by a foreign bank, but dealers said the currency would face downward pressure due to seasonal demand from importers and after a downgrade by Fitch Ratings.

Fitch on Monday downgraded Sri Lanka’s Long- Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to B-plus from BB-minus on increasing refinancing risks, significant debt maturities and weaker public finances.

Finance Minister Ravi Karunanayake and Central Bank Governor Arjuna Mahendran, however, said the downgrade would not impact the country’s borrowing. “The rupee ended firmer as there was some selling (of dollars).

But the pressure is still there,” said a currency dealer asking not to be named. The downgrade will be of concern to international investors and market players, analysts said, adding it would push up the cost of government borrowings in the international markets, adding pressure on the rupee. One-week rupee forwards, which act as a proxy for the spot currency, ended at 144.75/85 per dollar, firmer from Tuesday’s close of 144.85/95.

The spot rupee, which hit a record low of 144.65 per dollar when it resumed trading for the first time since January 27 last Friday, did not trade for a third straight session. It closed at 144.40/70 on Friday. Seasonal import demand is picking up ahead of the local New Year season starting in April, dealers said. Foreign outflows from government securities also weighed on the currency.

Foreign investors sold Rs.2.5 billion worth of government securities in the week ended February 24, data from the Central Bank showed, taking the total offloaded since December 30 to Rs.34.95 billion. Commercial banks parked Rs.38.465 billion of surplus liquidity yesterday, using the Central Bank’s deposit facility at 6.50 percent, official data showed.