Sri Lanka may sell rupee as post-war inflows increase

Sri Lanka may sell its currency should it gain too much as foreign aid and investments flow into the country after the end of a 26-year civil war, central bank governor Nivard Cabraal said.

“The currency could appreciate when large amounts of money come in,” Cabraal said in an interview in Colombo on Tuesday. “But we learnt some good lessons in 2005 post-tsunami that we shouldn’t allow these conditions to drive the economy by itself and there has to be some kind of intervention.”

Cabraal said excessive gains in the rupee could damage exports, which make up a third of the $32 billion economy and employ more than 2 million people in the island’s tea plantations and textile factories. Millions of dollars of aid after a tsunami hit Sri Lanka on December 26, 2004, increased demand for the rupee, strengthening the currency by 5.4 per cent the following month and halving export growth from a year earlier.

“The near-term pressure appears to be toward appreciation of the rupee,” said Anushka Shah, an economist at Citigroup Plc in Mumbai. Buying dollars will also help “build foreign- exchange reserves.”

The Lankan rupee has gained 2.5 per cent to 114.85 against the US dollar since May 16, when President Mahinda Rajapaksa declared victory over the Liberation Tigers of Tamil Eelam (LTTE) , who have been fighting for a separate homeland for ethnic Tamils since 1983.

Sri Lanka’s benchmark stock index, the Colombo All-Share Index, has climbed 16 per cent since the Tamil Tigers were defeated, taking its gains this year to 47 per cent. The index rose 0.6 per cent to 2,197.73 at 11.15 am local time, paced by John Keells Holdings Plc, which has investments ranging from transportation to tea and tourism. John Keells has increased 41 per cent since May 16.

Cabraal said foreign-exchange reserves increased by about $120 million in the past two weeks as overseas investors snapped up local shares on optimism of political stability returning to the Indian Ocean island nation.

“That has been very comforting to the foreign exchange situation,” Cabraal said.

The nation’s reserves more than halved in the six months from September to $1.4 billion as the global recession hurt export earnings, prompting Sri Lanka to start talks with the International Monetary Fund in March for a $1.9 billion bailout.

Sri Lanka’s overseas sales dropped 7.8 per cent in March from a year earlier, falling for the fourth straight month. That’s the longest period of declines since 2002.

Standard & Poor’s said May 21 the timing and implementation of the IMF loan was “uncertain” and cut the island’s rating outlook to negative from stable. S&P rates the nation’s long- term foreign currency debt at ‘B’, five levels below the investment grade.