Central Bank says rupee depreciation in line with past trends

The Central Bank, in a detailed analysis this week, argues that the current depreciation of the rupee against the major international currencies is in line with past trends and economic fundamentals.

The Bank, -- responding to criticism that the rupee appreciation is too high, impacting on imports and in turn the cost of living --, said under the independently floating exchange rate regime that prevails in the country the exchange rate had been depreciating at an annual rate of 5.9 per cent from January 1, 2001 to December 31, 2004.

“In comparison, in 2006 the depreciation of the rupee from January 1, 2006 to December 19, 2006 was 5.2 per cent. Hence, it is seen that the current depreciation of 5.2 per cent is somewhat consistent with the usual trend in the past and movements in economic fundamentals,” the statement said.

It said the analysis was intended to examine the behaviour of the Sri Lankan rupee and “assess whether the movement of the exchange rate in the recent past has been unusual and also to understand the underlying reasons for the behaviour of the exchange rate over the past two years.”

According to the movements of the Sri Lankan rupee against major currencies since end 2004, the rupee has appreciated against all major currencies during 2005 and depreciated against the same currencies during 2006. However, when the current exchange rates are compared with the end 2004 level, the rupee has appreciated against two major currencies, namely Yen and Euro, the Bank said.

The Bank said that in the aftermath of the December 2004 tsunami, the country received ‘exceptional foreign currency inflows in 2005 of around US$490 million over and above the regular inflows of foreign exchange.’ In addition, international lenders offered a debt moratorium during 2005 as a result of which the country did not have to service external debt repayments amounting to approximately US$374 million.

“The expectation of the receipts of large exceptional inflows for tsunami related relief and reconstruction activities caused a sharp appreciation of the rupee from the beginning of 2005 onwards. The subsequent realization of such inflows and the postponement of debt service payments resulted in the country’s balance of payments recording a surplus of US$501 million and the appreciation of the rupee against all major currencies during 2005,” the statement said.

Separately, Central Bank Governor Nivard Cabraal, asked to comment on UNP MP Bandula Gunawardene’s claim that the government was ‘artificially’ selling US dollars and reducing foreign reserves in the country, said that the Bank injected US$450 million in the market this year against $519 million in 2004.

“In 2005 it was just $190 million because of the inflow of tsunami aid and the debt moratorium,” he told The Sunday Times FT, adding that this year the Bank sold $600 million and mopped up $200 million.

He said credit expansion in August and September 2006 was the highest on record and commercial banks had been urged to slow down on lendings.