Sri Lanka May Sell Rupee as Post-War Inflows IncreaseSri Lanka may sell its currency should it gain too much as foreign aid and investments flow into the country after the end of a 26-year civil war, central bank governor Nivard Cabraal said.
"The currency could appreciate when large amounts of money come in," Cabraal said in an interview in Colombo yesterday. "But we learnt some good lessons in 2005 post-tsunami that we shouldn't allow these conditions to drive the economy by itself and there has to be some kind of intervention."
Cabraal said excessive gains in the rupee could damage exports, which make up a third of the $32 billion economy and employ more than 2 million people in the island's tea plantations and textile factories. Millions of dollars of aid after a tsunami hit Sri Lanka on Dec. 26, 2004, increased demand for the rupee, strengthening the currency by 5.4 percent the following month and halving export growth from a year earlier.
"The near-term pressure appears to be toward appreciation of the rupee," said Anushka Shah, an economist at Citigroup Plc. in Mumbai. Buying dollars will also help "build foreign- exchange reserves."
The Lankan rupee has gained 2.5 percent to 114.85 against the U.S. dollar since May 16, when President Mahinda Rajapaksa declared victory over the Liberation Tigers of Tamil Eelam, who have been fighting for a separate homeland for ethnic Tamils since 1983.
Very Comforting
Sri Lanka's benchmark stock index, the Colombo All-Share Index, has climbed 16 percent since the Tamil Tigers were defeated, taking its gains this year to 47 percent. The index rose 0.6 percent to 2,197.73 at 11:15 a.m. local time, paced by John Keells Holdings Plc., which has investments ranging from transportation to tea and tourism. John Keells has increased 41 percent since May 16.
Cabraal said foreign-exchange reserves increased by about $120 million in the past two weeks as overseas investors snapped up local shares on optimism of political stability returning to the Indian Ocean island nation.
"That has been very comforting to the foreign exchange situation," Cabraal said.
The nation's reserves more than halved in the six months from September to $1.4 billion as the global recession hurt export earnings, prompting Sri Lanka to start talks with the International Monetary Fund in March for a $1.9 billion bailout.
IMF Loan
Sri Lanka's overseas sales dropped 7.8 percent in March from a year earlier, falling for the fourth straight month. That's the longest period of declines since 2002.
Standard & Poor's said May 21 the timing and implementation of the IMF loan was "uncertain" and cut the island's rating outlook to negative from stable. S&P rates the nation's long- term foreign currency debt at 'B', five levels below the investment grade.
The IMF on May 21 said it is near an agreement to lend the money to Sri Lanka, clarifying its position a week after U.S. Secretary of State Hillary Clinton said the U.S. was reluctant to support an IMF loan to Sri Lanka given the escalation in the country's civil war.
"The IMF loan has been delayed because some countries have expressed concerns which are of a non-economic nature," Cabraal said. "The IMF charter doesn't allow for such issues to be raised in the provision of structural loans - this will set a bad precedent."
Civil War
Now that the war is over, foreign direct investments into Sri Lanka could quadruple to as much as $4 billion a year by 2012, according to Dhammika Perera, chairman of the Board of Investment of Sri Lanka.
The last time Sri Lanka faced a huge inflow of foreign cash was when the tsunami struck the nation and killed more than 30,000 people.
The challenges the inflows may pose this time include higher inflationary pressures, Cabraal said.
"For the moment, inflation is benign and we expect it to touch zero percent by June," Cabraal said, adding that such a scenario would give him room to keep interest rates low and support economic expansion. He said the 3.3 percent increase in consumer prices in May from a year earlier, after a 2.9 percent gain in April, was a "blip."
Cabraal said the central bank will this month revise the nation's growth forecast for 2009, and may almost double it to 5 percent because of the increase in business confidence and as the liberation of rebel-occupied land boosts farm production.
"For a long time, every time someone spoke about Sri Lanka's economy, the response was if only not for this war," Cabraal said. "Today that has been removed and we have a tremendous new scope for economic development."
