Business Times

Dollar seen weakening to Rs 106-108 in 2011

The US dollar is seen further weakening against the Sri Lanka rupee to between Rs 106-108 (per dollar) this year, according to bankers, amidst assurances by the Central Bank that it would act as a buffer against any major volatility in the money markets.

Bankers, who spoke to the Business Times on condition of anonymity, gave the range in which the dollar would be pegged at right through the year based on a strong flow of the US currency into Sri Lanka.
On Thursday, Central Bank (CB) Governor Ajith Nivard Cabraal assured bankers and exporters that no major exchange rate volatility will be permitted.

Asked (during question time) during a presentation he made at an HSBC breakfast meeting on the CB roadmap for 2011 whether the CB has exchange rate targets for 2011, Mr Cabraal said; “ No we don’t have any targets.”

He said the CB will follow its exchange rate policy where decisions are based on market trends. “We will not allow it to be volatile but ensure that companies are able to make exchange rate decisions without any uncertainty in the market.”

The US dollar, the most traded currency vis-a-vis the Sri Lanka rupee, is around Rs 110 per (1) dollar currently compared to Rs 113, a year ago in January 2010. The easing of the rupee has also led to exporters bringing back their proceeds anticipating a further erosion of the Sri Lanka currency, according to bankers.

They said among other developments expected this year is that interest rates are likely to go up based on inflation trends which is tending to rise. Banks are flushed with funds and highly liquid but no good private sector projects to fund in 2010. “There is a lot of competition among banks to lend but with interest rates low, margins are thin,” a treasury official at a local bank said.

He said everyone expects the economy to pick up this year with increased private sector activity. Another mid-level banker attributed the slow movement in bank lending in 2010 to companies too having their own funds. “On the other hand, banks are extending a level of caution to ensure the projects seeking funds are viable ones based on bad experiences in the past,” this banker said.

He said he expects money to flow from the stock market to the land market where demand will pick up in the next few months. Bankers are also worried that western investors are yet to come into Sri Lanka in a big way even though there is peace and stability, more than 18 months after the conflict ended in May 2009.

In most cases, western investors in projects or funds are raising concerns about political developments and human rights which was an issue when a local fund sought to raise capital late last year in the global markets.

“They keep raising these issues despite our assurances that Sri Lanka is possibly the safest and most secure place to invest,” the mid-level banker said.

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