The Central Bank (CB) has been re-assured by President Mahinda Rajapaksa that there won’t be any more pronouncements of the depreciation of the rupee or devaluation that sent the banks into a dizzy spin this week.
“The President has assured me that there won’t be any more pronouncements and that the 3 % devaluation was a one-off thing,” CB Governor Ajit Nivard Cabraal told the Sunday Times.
The President’s announcement of a devaluation of the rupee, which many economists say is over-valued as high as 20%, caught the money markets by surprise and banks scrambled to sort out uncertainty among their clients.
Mr. Cabraal said he had several conference calls with overseas investors, many who invested in treasury bonds and T-bills some of which were rupee-convertible instruments. “We have assured them that there are no more (surprises),” he said. Foreign investors who invested in rupee bonds may now have to pay more rupees to convert these bonds to dollars when the term of these bonds ends.
Other Central Bank officials, who declined to be named, were miffed by the announcement since such mechanisms are the mandate of the market (CB) and not the Treasury. However Treasury officials defended the move saying such pronouncements have been made in the past (post-1977 during the UNP administration), and that a weaker rupee was hurting exports and export competitiveness.
The Sunday Times learns that Mr. Cabraal has expressed his concern to Treasury Secretary P.B. Jayasundera over the move saying the country is in a very stable financial situation and there was no reason for devaluation. Other money market experts say devaluation, if ever, should have been gradually enforced through the market (over a period of time), instead of a one-shot exercise which is not good for investor confidence and credibility.
The Governor shrugged off reports of such concerns being raised with Dr Jayasundera. “What concerns? We always exchange notes and have regular communication,” laughed Mr Cabraal, denying that there was any such move.
The CB pumped in millions of dollars, normally a routine exercise, to stabilize the market this week to keep the dollar at realistic levels. The Bank routinely sells or buys dollars from the market to even out the demand or shortage and ensure the dollar is kept stable for either side – exporters and importers.
Economists said the devaluation could see prices rise in fuel, wheat flour, drugs, sugar, dhal and other essentials while pointing out that efforts to encourage import-substitution industries in the budget would balance the equation.
“Currency movements must take into account both the needs of exporters and consumers (import goods). A good exchange rate is based on good productivity in essential items, minimizing the need for imports -- which we still don’t have. Thus import costs are also essential to consider in weakening the rupee,” one economist added. The devaluation is also seen as a measure to reduce unnecessary imports.
Meanwhile, Treasury Secretary Jayasundera told Reuters the exchange rate should be driven by market forces, except in cases of volatility.