Sri Lanka should think carefully before any currency devaluation

Sri Lanka should think carefully about devaluing the rupee as it may not be a good strategy to follow, even though other countries are trying to increase exports by weakening their domestic currencies, newly elected member of parliament and former deputy minister of policy planning Harsha de Silva said.

“I, as an economist, do not believe by adjusting macroeconomic variables like interest rate and exchange rates, that we can become a competitive economy. That cannot happen,” he said.

“The only way that we can become efficient and competitive is if we consciously consider reforms in an economy in order to make production goods and services efficient and competitive.”

De Silva said the Sri Lankan rupee has depreciated two and half percent against the US dollar for this year.

“Every country is trying to increase exports (to the) same strong markets such as China,”

“Some countries are trying to devalue their currencies for exports competitiveness. This may not be good strategy for countries like Sri Lanka to follow,”

“If American interest rates start to go up what will happen to FDI (Foreign Direct Investment) and investment flows to Sri Lanka? Therefore we need to think carefully before any currency devaluation.”

Analysts say the move to devalue the rupee will help boost exports and conserve foreign-exchange reserves but some counter argue saying the depreciation of the currency increasess the rupee value of foreign debt repayments and with the high debt payments to foreign agencies the government will have to pay a huge amount of rupees.

However, they point out that with the depreciation the revenue side will also increase making the government a net gainer.

Sri Lanka’s central bank allowed the rupee to fall 15 cents to 134.25 to the US dollar Tuesday.

“If we depreciate what is going to happen to inflation. Because we import a large amount for our consumption market. So we are restricted in terms of depreciating. So what options do we have?

Competitive economy though competitive exports is the only solution, de Silva said.

“I’m not one to believe this should happen though depreciating our currency. It will help us in the short term. But we have to become an efficient economy in the long term moving our exports to non-tradeable to tradables in this larger unsettled changing market.”(LBO)