The Central Bank managed the currency, interest rates and inflation in a pragmatic manner during the most difficult of war times, where today Sri Lanka is rewarded with a GDP growth rate that will soon surpass India. However, the compulsion of the Central Bank to defend the rupee by selling dollars from our meagre forex reserves of $ 8 billion will prove costly for Sri Lanka's investment climate said an investment fund expert
Dulindra Fernando, Managing Director of Ceylon Asset Management Co. Ltd noted that During the East Asian Financial crisis in 1997, when George Soros "ran down" the Asian currencies from Thailand to Indonesia, the Central Banks of those economies defended their currencies by selling foreign currency reserves.
After the reserves of those Central banks were exhausted, the currencies were depreciated without any further resistance, and Soros bought back the currencies which he had sold before at a higher value, and repaid his local currency debts taken before. The Reserve Bank of India at that time stated that India was safe because of their prudent policies, i.e. the capital account being closed.
Foreign investors recently witnessed most Asian currencies decline when US institutional investors began selling liquid assets across the world to settle debts in the US. Most Asian currencies from Malaysian Ringgit, Singapore dollar, Indonesian Rupiah and even the Australian dollar sank to new lows while the SL rupee remained unchanged. The rupee was then "devalued" 3% during the budget.
Many foreign investors question why the SL rupee alone has remained relatively unmoved when other regional currencies have declined nearly 10%.
Mr. Fernnando pointed out that considering the growing import demand, foreign investors naturally expect a further depreciation of the SL rupee in the near future.
The reaction of most foreign investors already in Sri Lanka is to sell their liquid assets and get out of the SLR immediately, while prospective investors will wait until the rupee depreciates further before investing. This behaviour will explain the foreign selling of blue chips on the CSE and of Government Securities, leading to a rise in interest rates of almost 1.5%.
Therefore, I expect the negative investment climate in Sri Lanka to improve, if the Central Bank allows the rupee to fluctuate with competitive market forces, passing on the forex loss to foreign sellers exiting now.
It is also important to save our hard earned forex reserves, bearing in mind that the debt crisis and a likely recession in the EU and the US has only just begun to unfold
In the recent past India has become victim to a sudden flight of overseas capital causing their currency to depreciate by 15% over the last two months. After having become a favourite destination for foreign investors it was suffering the reverse capital flight of Foreign Institutional Investors (FII's).
However, it is important to note that India did not sell its vast foreign currency reserves in excess of $ 500 billion, to defend the INR.
The RBI allowed the Indian rupee to decline 15% rather than sacrificing their foreign currency reserves. Hence, foreign Investors exiting had to sell the INR at a 15% loss., he said. |
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