Central Bank advises businesses to grasp current exchange rate mechanism

• Says there is a lack of understanding of exchange rate
• Cautions if exchange rate is controlled, it would lead to a boom-and-bust cycle

By Nishel Fernando 

The Central Bank emphasised the importance of businesses in Sri Lanka understanding the current exchange rate system.

As it would enable them to establish more precise expectations, thereby reducing the risk of incurring losses due to currency exchange fluctuations.
Sri Lanka’s businesses, the exporters in particular, recently called for a stable and competitive exchange rate, amidst the recent sharp appreciation of the rupee. 

“The mechanism of how the exchange rate is determined is important to understand because the legacy of long periods of fixed exchange rate at a certain rate, the entities have got used to it, thinking this is the way to do business.

For example, when you have an expectation of the exchange rate at Rs.350 and it ends up Rs.300, there’s a loss for that business. That’s again an issue of creating expectations and lack of understanding of the exchange rate,” Central Bank Governor Dr. Nandalal Weerasinghe said.

He said that the businesses are better equipped to make more accurate and better judgements by understating the current exchange rate regime. 
“In the current regime, what we are trying do is to smoothen up the volatilities,” he said. Dr. Weerasinghe noted that due to the current underline macroeconomic issues, the country is not in a position to fix the exchange rate as expected by many. 

“If you want to control this outcome of the exchange rate, first you need to fix the root cause, that’s fiscal imbalance and external balance. Without addressing those things, if we try to control the exchange rate, as we have done in the past, it would lead to a boom-and-bust cycle,” he added. He stressed that price stability, which is the core objective of the Central Bank, cannot be maintained through exchange rate fixing in the country. 

Meanwhile, Sri Lanka Banks’ Association Chairman and Standard Chartered Sri Lanka Chief Executive Officer Bingumal Thewarathanthri expects a stronger rupee upon the completion of Sri Lanka’s external debt restructuring, with inflows coming in. However, he predicts a depreciation of the rupee soon after.

“The rupee won’t slide in a big way but we expect after that we will hit the bottom and the rupee will depreciate by 5-7 percent, as it has historically performed that way,” he added.

However, he acknowledged the concerns raised by the exporters on the competitiveness of Sri Lanka’s exports in the global market, due to the strengthening rupee and elevated input costs.
“We believe we will reach some level of stability; we have to watch this space carefully,” he said.