Sri Lanka apparel exporters say depreciation needed; bailout doubtful

Jan 21, 2009 (LBO) – Sri Lankan apparel exporters say a sharp depreciation of the rupee is needed, as demand falls in major markets and hurdles on a promised state bailout may limit its usefulness. The rupee has fallen to 113-114 against the dollar from around 108 last September.

“If the rupee is around 118 – 120 it would mitigate some of the (other negative) circumstances and help us in maintaining present employment levels which is a critical factor,” Dias said.

“Inflation is now at 16 percent. So would a rate of 118-120 be enough? The answer is that we must have that immediately. But the government is thinking of that rate towards the end of 2009 which is too late we think.”

Soft Peg

Countries that have ‘hard pegs’ or currency boards to a foreign anchor currency, can have a fixed exchange rate with no negative effects indefinitely. Hong Kong for example has had a fixed exchange rate of 7.80 with the US dollar since 1983.

Singapore also runs a modified currency board, where the exchange rate has appreciated steadily.

Japan and Germany (before joining the Euro) have had true floating exchange rates and managed to have an appreciating exchange rate and becom