ECONOMYNEXT – Sri Lanka’s rupee has fallen 3.3 percent so far this year, much less than several other currencies in the region, Finance Minister Mangala Samaraweera said.
Pakistan’s rupee has depreciated 10.5 percent, the Indian rupee 8 percent, Indonesia’s rupiah 5.2 percent and the Thai Bhat 5.4 percent he said.
“The recent depreciation of the Rupee is due to external factors, particularly the rise in policy interest rates in the United States,” Minister Samaraweera said at the 129th annual general meeting of the Ceylon Chamber of Commerce.
“This has affected all emerging and frontier market economies all over the world.
“In fact in the last couple of days the Sri Lankan Rupee has appreciated slightly as macroeconomic fundamentals do not warrant a serious depreciation of the currency.”
“The policy of this government is that the currency should be determined by market forces.”
A currency is determined not by market forces but by the montary policy regime that is followed.
A true floating currency that does not intervene in forex markets (either to collect reserves or stop the currency falling), will move down (against the US dollar) if the US currency appreciates.
However countries that have credible pegs, with monetary policy to back it, does not fall. The Hong Kong dollar has not moved since 1982.
Most Middle Eastern currencies which piggy back on US rates have also do not move, though they are not 100 percent credible like Hong Kong, which has a currency board.
In order to have full control of the currency (either to fix it like Hong Kong or have a planned depreciation) interest rates have to be allowed to float.
Analysts have identified several problems with Sri Lanka’s monetary regime that needs reform, including a trigger happy domestic operations department of the central bank and interference in the 3 and 6 month Treasury bill yields.
Central bank purchases of dollars from the government when the rupee comes under pressure is another key factor which tends to make it difficult for the currency to recover, analysts have pointed out.
Sri Lanka now has a policy rate of 8.5 percent, which is far enough above the US policy rate to steady the currency, analysts say, if consistent policy followed and dollars are not bought from the Treasury to inject liquidity. (Colombo/Jun29/2018)