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Friday, 23 March 2012 00:01 - - {{hitsCtrl.values.hits}}
In an apparent move to becalm speculative and uncertain markets as well as other stakeholders, Secretary to the Treasury Dr. P.B. Jayasundera yesterday reassured that crucial depreciation of the currency would settle down to below Rs. 125 to the US Dollar and that reserves depletion had been arrested.
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| Secretary to the Treasury Dr. P.B. Jayasundera flanked by other senior Finance Ministry officials address the media conference yesterday – Pic by Upul Abayasekara |
“Given the measures already taken, I can confidently say that the reserves depletion has been arrested. The spike of the US Dollar exchange rate to Rs. 130 was a reflection of clearance of backlog of demand and commitments on bill settlements. The exchange rate will move back and stabilise below Rs. 125,” Dr. Jayasundera told a packed media conference flanked by senior officials of the Finance Ministry.
The Finance Secretary’s optimism stems, as he explained, from the fact that a correction in the exchange was warranted after the external trade account came under severe pressure owing to the sharp rise in oil prices (with imports touching near $ 5 billion) and higher degree of overall imports, especially in the latter stages of last year.
“We faced an external shock,” Dr. Jayasundera said, referring to the $ 10 billion trade deficit in 2011. He suggested that its circumstances changed dramatically since the presentation of the 2012 Budget in November.
As a Budget move the Government devalued the rupee by 3% to Rs. 113 followed by a policy decision to a near free-float in February along with a few complementary monetary policy moves, such as increasing policy rates and curtailing credit growth apart from the Government adjusting upwards the prices of fuel, electricity and transport.
He also expects demand for forex to ease off from April onwards whilst dollar inflows and reserves are likely to remain resilient with lower expenditure on imports and higher export earnings.
Subject to oil prices remaining intact, Dr. Jayasundera forecasts value of imports in 2012 to be reduced by at least $ 1 billion whilst exports are forecast to grow by $ 1 billion.
Among factors that justify the correction in the rupee’s value, the Treasury Secretary said in January the Central Bank is estimated to have sold $ 600 million followed by $ 300 million in February, whilst so far in March it stands at $ 120 million.
“This shows there has been a near $ 600 million saving,” he said in response to a question regarding his reaction to reports that the Central Bank had expended $ 2.7 billion in defending the currency last year.
He also said that the depreciation of the rupee as well as monetary policy measures taken were Budget-positive apart from sending an emphatic message that Sri Lanka’s economy moving from a consumption-oriented to a savings and investments-driven real economy.
“We are focused on achieving a Budget deficit of 6.2% of GDP,” he said, though noting that as part of adjustments, the 2012 GDP growth forecast has been revised to 7% from 8% previously.
He also said that Foreign Direct Investments (FDIs) will be over $ 1 billion or maximum $ 2 billion with several solid projects in the pipeline. It was pointed out that more importantly several key mega projects such as Shangri La and Colombo South Terminal are at the construction stage.
“We are not keen to draw FDIs by overheating the economy,” he said, suggesting a degree of consolidation was expected in terms of FDI whilst accelerating domestic investment.
“Whether we did it sooner or later, Sri Lanka has done what is appropriate given the external shock,” he said to stress that the rate correction had already paid dividends.
“Allowing markets to determine rates with appropriate intervention to prevent erratic movements is the best course,” Treasury Secretary emphasised.
With regard to the future of IMF support, Dr. Jayasundera said that it wasn’t a major concern for the Government but if it were to come through, it would be a bonus.
He also said that the Government would re-float the $ 500 million Sovereign Bond which matures this year. “We haven’t decided the exact value or the tenure as yet,” he said, adding that going for affordable debt wasn’t a bad policy. “We all need a good dose of pressure, diabetes and cholesterol, but high doses of those is what must be avoided,” Dr. Jayasundera added.
