The depreciation of the Sri Lanka rupee quickened over the last two weeks as demand for dollars increased after the government eased restrictions on overnight foreign currency positions that commercial banks can hold.
Foreign exchange dealers said demand for dollars also went up now that big government import bills are once again going through commercial banks rather than being routed solely through the two state banks.
The movement gave rise to rumours of an impending devaluation of the rupee to be announced in the budget this week but this was dismissed by dealers who said there was no undue pressure on the local currency.
"The dollar-rupee rate hardly moved last month but has increased in the last two weeks," said Gamini Karunaratne, senior deputy general manager, Treasury, at Hatton National Bank. "This may be because the Central Bank is also buying dollars. It gives a signal to the market that they don't mind the dollar going up."
The increase in the overnight trading positions of banks and routing of big government import bills through the foreign exchange market may also have pushed up the dollar owing to increased demand, he said.
Dealers said the resources of state banks were limited and that they may have borrowed dollars to fund big import bills in the past, increasing their liabilities.
Mangala Boyagoda, head of global markets at Standard Chartered Bank, said he expects the rupee to stabilise at current levels.
"With the increase in overnight limits, banks have more leverage to hold positions," he said. "So demand for dollars has increased. Also, we are close to the budget - so importers are covering themselves forward."
Dealers said there was some 'moralsuasion (pressure)' by the Central Bank which was trying to discourage speculative transactions that could destabilise the rupee.
The recent easing of restrictions on overnight positions, imposed in January 2001 with the snap devaluation of the rupee, might indicate a further loosening of restrictions, a dealer with a foreign bank said.
Karunaratne said the Central Bank's acquisition of dollars might indicate it wants the rupee at a particular level by the end of the first quarter to make exports more competitive. With Sri Lanka being an import-dependent economy, importing even staple foodstuffs like rice and sugar, demand for foreign exchange increases every year resulting in continued downward pressure on the rupee, he said.
The United National Front (UNF) government's first budget, to be presented on Friday, is unlikely to provide much comfort to consumers but is expected to give directions on government policy for investment and growth.
Most analysts believe there would be a strong IMF influence in the budget. "This is an IMF-led budget. The government needs IMF assistance to finance the budget deficit and bring back the standby facility," said a private sector economist, who declined to be named. "If the IMF is convinced on budget direction, foreign direct investment could flow in."
Price changes in essential commodities and relief to consumers are unlikely to come in the budget as some of it is already taking place, said Radhika Jayasundera, assistant vice president at DFCC Stockbrokers. "However, I think (and hope) the government would divulge its plans on reforms and development."
This year's government expenditure is estimated at Rs. 348 billion, down from an estimated Rs. 417 billion in 2001. Defence has also been cut to Rs. 50 billion from Rs. 75 billion in 2001.
Ajit Gunawardene, director at John Keells and chairman of the Colombo Stock Exchange, said there were hopes that the budget would provide some direction on government policy. "We are living through a tough economic environment, revenues have shrunk and no one expects quick fixes in the budget."
He said the peace process would also provide a base for growth and investment.
Analysts said a new tax structure with GST being replaced by VAT (Value-added Tax), cuts in excise duties and incentives for industry and to encourage foreign investment, are expected in Friday's budget.
Finance Minister K.N. Choksy, in a recent interview, said the budget would spell out an overall plan to reform the economy with targets for growth, and provide incentives to the private sector to invest capital. He said a new tax structure was also being worked out.
DFCC's Jayasundera said the peace process has improved business sentiment with senior managers in the private sector positive on investment.
S.S. Colombage, a retired Central Bank economist, believes defence expenditure would fall but at the same time the government would be pumping more money for rehabilitation in the north and the east.
Capital expenditure, which has been declining as a ratio of GDP, is set to increase. Colombage said it would be difficult to trim the budget deficit to 8.5-8.9 percent.
Dushantha Wijesinghe, head of research at Asia Capital, said the economy would contract in first half 2002 due to increased power cuts, a continuing drought that affects agriculture and since tourism has still not recovered.
"The strength of the economy would depend on a continuation of the peace process. We see an economic recovery in the second half if the peace process gathers momentum," he said, adding that the privatisation programme seemed to be on track.
He said the peace process would also lead to defence cuts, ease borrowing pressures and increase development. "There will be more funds from multilateral and bilateral agencies and a pickup in consumer demand if the peace process holds."
When SriLankaFirst launched its business peace initiative last year, there were many cynics around. Outside the business community, not many were interested and some in fact were suspicious of these moves. Are some sections of the community supporting the LTTE? Shouldn't the business community be telling Velupillai Prabhakaran to stop the war instead of putting pressure on the government only? These were some questions asked.
Urging the government to resume peace talks is a natural tactic adopted by most peace NGOs for obvious reasons – Prabhakaran doesn't listen though he appears to be listening now.
SriLankaFirst promoters like Jagath Fernando were also asked "awkward" questions such as why they were talking about peace now when the business sector had been silent in the past years of the conflict. The promoters were courageous enough to admit that this was a major weakness and that the July airport attack was the "wake up call" to the economy.
The past needs to be set aside. The country has had enough of living in the past and the business community deserves some praise, at least now, for putting pressure on politicians from both sides to end the war and restore peace, even if it means looking at parochial interests like the cost on individual companies. Remember, a business or industry collapse means job losses and deprivation for families of those employed in struggling small and medium-scale industries.
Running parallel to the SriLankaFirst initiative is the Biz Forum comprising top chambers of commerce and industry, which has been separately canvassing political parties to put the peace agenda at the top of their priority list.
So far the peace process is holding and the only problems are protests by various political groups opposed to peace talks and the ceasefire. Peace talks are due to start in mid-2002 and given the new government's careful approach to the entire process, the business community is pinning a lot of hope on a solution being thrashed out by both sides.
It is in this context that it is heartening to note the decisions by conglomerates and other leading companies to invest in Jaffna and the rest of the north and the east.
Industries Minister Rohitha Bogollagama's visit to Jaffna – just before Prime Minister Ranil Wickremasinghe went there on Thursday - at the head of a 60-member business delegation has seen a tremendous show of interest by the business community to develop the north. That's good going … so far.
John Keells, Aitken Spence, Tokyo Cement, Keangnam, MTN Networks, Sampath Bank and state institutions such as the Export Development Board and the People's Bank want to start projects/units in Jaffna.
These are positive signals to a region that is desperate for investment and the creation of new industry.
Many companies are also seen setting up offices and branches in other parts, like Union Assurance Ltd which set up an office in Batticaloa. The north and the east have been starved of any start-up ventures or big business in the past two decades, which can generate jobs and result in prosperity for its residents.
In the past, journalists and ordinary folks from the south visiting Jaffna or other war-affected areas were often told by residents that the biggest problem they face is lack of job opportunities which is possible only through new industry. The few big projects in the north like the KKS harbour and the cement factory have suffered due to the war. Thriving prawn factories run by some top Colombo firms are mere shells today having suffered in bomb attacks.
The war against war can only be fought by providing opportunities to people in the north and the east. The business community has a big role to play here. With the government quickly moving out of key sectors of the economy in recent years and grappling with a problem of financial resources, it is the private sector that plays a lead role and is perhaps the biggest employer nowadays.
It can provide the key to peace. If and when the peace process gets stronger, it is up to the private sector big guns to match their words with deeds and quickly invest in that region.
A stronger private sector presence – while the government with the help of the multilateral agencies fund infrastructure development – would create a whole heap of opportunities and convince the people on the benefits of peace. Residents then would put pressure on the LTTE, if some reluctance is seen to forge a peace pact with the government and end the war, once and for all.
The business community, so far has been united in its peace efforts. It should not waver. As much as people depend on the government to find a solution, it is the private sector that can deliver the goods.