ADB says Sri Lanka needs to depreciate Rupee value

ADB officials spoke about Srilanka's economic conditions at a news conference held to mark the release of the bank's Asian Development Outlook 2009 report.

Sri Lanka should adopt a more flexible exchange rate policy and depreciate the rupee to make more competitive exports and better manage the demand of imports, the Asian Development Bank said.

"If the rupee is devalued now it may not have a dramatic impact on exports. But looking at the future when the global economy revives, then Sri Lanka will be in good shape if it has an appropriate exchange rate policy," said Rao, ADB Lead Economist for Sri Lanka.

Rao said two issues of concern are the fiscal deficit and the external account in which the exchange rate policy will play a key role.

"Rather than introducing many ad hoc (import) taxes that distort the market, it is better to manage import demand through exchange rate policy," said Richard Vokes, ADB country director.
"The ADB will argue that we want your exchange rate to be appropriately valued so it maximises exports, minimises imports, and maximises export substitution - a lot of items imported could be made domestically. So you want to try and encourage that."

"Srilanka government's policy space to give a stimulus to the economy was limited because of the large budget deficit and low foreign exchange reserves. Fiscal policy remains a major area of concern because it leaves the government very little room to stimulate the economy.
Sri Lanka's stimulus package is relatively small compared to other countries, the reason being that the government does not have the funds to stimulate the economy further.
But Sri Lanka does not have that fiscal space to be able to stimulate the economy.
Unless a fiscal correction takes place burden of adjustment will be falling on capital spending which means compromising on long-term growth.
So it's important measures are taken to increase revenue and there's some streamlining of current expenditure." Rao said.

"Another thing which reduces Sri Lanka's ability to stimulate the economy is the low level of foreign reserves because the moment you have a large fiscal package it will feed into the balance of payment. With demand for exports shrinking, it will mean further depletion of foreign exchange reserves."

Rao also acknowledged the government faced severe constraints with the biggest spending items being salaries, interest payment on debt and subsidies.